The setup heading into earnings
Buying Netflix (NFLX) right before this earnings report is like playing Russian roulette, and probably not a good idea. The implied volatility is 9%, which is high. That means after earnings the stock could land in the low 60s or the high 70s - a wide swing. Over the last four quarters, the stock has dropped after reporting, anywhere from 2% to 10%. Management needs to give a real reason to own it.
The year-to-date picture is weak. The S&P 500 is up 13-14%, while NFLX is down 25%. Over one year the stock is down 42%. It currently trades at 69, off a $124 high one year ago, and at the end of the segment sat at $69.33. A strong bull case is hard to make.
The bull case
The international footprint is one plus. The product is sticky. Netflix is a first mover, and some of the hold on customers is inertia - people too lazy to call and cancel. People rarely say they canceled Netflix; they just don't.
Competition is real: YouTube (GOOGL), HBO Max (WBD), and Paramount (PARA). Viewers hop around - they watch the few movies and series they want, binge, then switch to another service. But Netflix holds users well.
A big problem for sizing the company is missing data. Netflix stopped giving subscription numbers. The last figure, from the end of 2024, was over 301 million paying members worldwide. The customer acquisition cost (CAC) - what it spends to win each subscriber - is also not disclosed. Those are two missing pieces of the puzzle.
Subscriber growth could restart with new hits. There is a new show about a fisherman and water. On Thanksgiving Eve, Netflix will carry the NFL for the first time, plus WWE live entertainment. This push into live TV, on top of traditional movies and series, could lift subscriber growth even though the numbers stay hidden.
Netflix does a good job for customers - you can ask the platform to show you shows like one you enjoyed. A new hit can act as a loss leader: a viewer comes for one show and gets hooked on others. The company swapped out many creative directors and brought in new ones, which could produce another Squid Game. Content that already worked worldwide includes Ben Affleck's "Animals," which won audiences despite poor reviews, and "Remarkably Bright Creatures."
Revenue is up more than 10% year-over-year, about 12%. Netflix has been cutting jobs to hold down costs and is making leadership changes.
The bear case
Revenue up 12% while the stock is down 40% signals tight margins. Content is costing more. If you pour billions into original programming, you need results, or shareholders will not reward the stock - which is what has happened.
On viewing time, YouTube (GOOGL) commands about 14% versus Netflix at 8%. Netflix is chasing eyeballs that sit on YouTube and TikTok, so the landscape is tough.
Guidance will decide the reaction. Like most tech companies, the third quarter ending September 30 is the rearview mirror - what matters is the fourth quarter and the rest of the year. If Netflix doesn't get things going, it becomes a target for tax-loss selling. Winners get marked up for window dressing so portfolios look like they held Apple (AAPL) and Microsoft (MSFT). Losers face ugly selling pressure from early December to year-end, because money managers don't want Netflix showing up as a top 10 holding.
Peter Rice, the Walt Disney (DIS) executive, was brought on to draw a wider audience. He knows the industry and how to do this, so new leadership may help. The company has been spending heavily on content, roughly 20 billion. The open question is engagement: if those trends are softening, it hurts revenue.
Advertising is the main lever
Live sports is where streamers are winning, and it has proven lucrative. For years the CEO said people who pay to remove ads would never see ads. That promise should be dropped. Most viewers can live with an ad or two - in a car or crash movie, show a Dodge or Chrysler (STLA).
Netflix runs tiered plans (gold, platinum, and others). The biggest opportunity is advertising, estimated to double this year to 3 billion. Beyond that, Netflix could squeeze some ads onto the no-ad payers. With over 300 million members - the 2024 figure - targeted ads could push ad revenue past 3 billion, maybe to 5 or 6 billion. That is the best catalyst to bring in more revenue.
Recent layoffs raise another question: whether management will say more about them or about cutting costs overall.
