Investors have some burning questions in the upcoming earnings report from Netflix (NFLX 8.20%). The streaming video giant shocked Wall Street in mid-April when it forecast millions of subscriber losses for the current quarter. Executives also said second-quarter revenue would grow by about 10%, or about half the pace management had been targeting last year.
That delay is a major concern, but I see two more major issues that Netflix needs to address in this earnings announcement. The first impacts short-term growth and the other forms the core of the investment thesis for this battered stock.
Let's take a look at the key concerns in the July 19 report.
1. How low can the growth go?
The immediate question is where Netflix's growth rate might stabilize after a sharp decline in each of the last quarters. It was only about a year ago that the company achieved solid sales growth of 20% or more. And that level is not arbitrary, but reflects key financial goals for the company. “The big prize is to keep revenue growth at 20%,” said Co-CEO Reed Hastings in early 2021.
NFLX Revenue Data (QA Annual Growth) by YCharts.
Since then, Netflix's annualized growth rate has dropped from about 24% to less than 10%. We'll learn on Tuesday whether executives see a further decline coming in the third quarter. On the other hand, the company may have spurred renewed engagement through popular content such as season four of Weird stuff.
Netflix also took a different approach to that show's final season by staggering its release. That shift could support higher subscriber numbers at the start of the fiscal third quarter, but it could also help increase engagement overall as it becomes a broader practice.
2. Is the flywheel broken?
Netflix's growth approach over the past decade has had a central theme described by management as a virtuous cycle. It goes like this: the company spends money on content and on improving the streaming experience. In response, more people are signing up for the service and Netflix has room to raise prices, giving it more money to invest.
The best explanation for the stock price collapse in 2022 is the fear that this cycle has been broken. Netflix has increased content spending over the past year, releasing dozens of major original series and movies. Still, engagement is declining and new user signups are slowing down.
Competition plays a role, and so does the distribution of free or heavily discounted streaming content options. Netflix aims to neutralize that price threat by offering its own ad-supported tier soon. The competitive threat isn't new either and could actually make the streamer a better business over time by forcing it to improve its game in areas like show content, video games and the tech platform itself.
There's no shortage of areas for Netflix to attack here, and its large, cash-flow-positive business and industry leadership position should give it an edge over most of its peers. But investors will only be excited about Netflix as a growth stock again if the company can show a clear line between the investments it makes in the company and accelerating its subscriber base.
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