Nefflix (NFLX.US) delivered a mixed Q1 financial report yesterday, presenting lower-than-expected revenue and slightly higher-than-forecast earnings. In 2022, Netflix’s declines foreshadowed weakness in technology company stocks. Will that be the case this time as well? The stock lost 2% before the open, and the bulls managed to stop the first 10% plunge after the report.

• Netflix added 1.75 million subscribers in Q1, i.e. well below forecasts and the growth rate fell 77% from Q4
• However, the company reiterated its financial forecast for 2023 and estimated $8.2 billion in revenue in Q2 (3% y/y growth)
• The company conveyed that it is dismissing the issue of a final crackdown on password sharing, which was originally expected to bolster its earnings as early as Q2 of the year
• Netflix cited optimization as the reason, which, according to management commentary, will ultimately have a positive impact on both the business and the technical side of the changes being implemented
• The company stressed that competition from other entertainment platforms remains strong. The company is winding down the DVD shipping business it started with. Its profitability has fallen dramatically in recent times.

Revenues: $8.16 billion vs. $8.18 billion forecast ($7.87 billion in Q1 2022)

Earnings per share (EPS): $2.88 vs. $2.86 forecasts ($3.53 in Q1 2022)

Subscriptions: 232,5 mln and 1.75 million growth vs. 2.3 million forecasts and 7.66 million previously (down 77% q/q)

Netflix reported net income of $1.31 billion vs. $1.65 billion in Q1 2022, when its shares took a tumble. The y/y result is much weaker, and the fundamental valuation is still unattractive, at a significant premium to the Nasdaq index average. It seems that if the recessionary scenario materializes, the current valuation, with the current growth momentum maintained, may be almost unsustainable for Netflix. In line with its new policy, the company did not provide subscriber estimates for the coming quarters. Revenues from North America grew 8% y/y, but revenues from Europe, Africa and the Middle East fell 2% y/y, with a slight 2% increase in Asia.

Password sharing and advertising in trouble?

• In 2022, the company estimated that 43% of users globally share accounts (more than 100 million households). The end of the practice could mean increased profits, with the possibility of adding people to accounts for a fee;
• The solution has again been postponed to Q2, so at best, investors could see the effect during Q3;
• However, the timing could coincide with a recession, when central bank rate hikes will begin to fully impact economies and the labor market;
• The company relayed that in Latin America it is seeing more revenue after implementing paid account sharing, and in Canada it has also seen an increase in customers from it
• Netflix estimates, based on Nielsen data, that interest in the service with ads will shrink in the near term. However, the company believes it will eventually grow supporting revenues
• The company does not rule out a possible strike by writers from the Writers Guild of America, which could negatively affect content production.

Summary

An uncertain macro outlook and last year’s subscriber declines prompted the company to focus on controlling expenses and net profits more than increasing subscriptions. Earnings per share barely managed to beat forecasts and posted a large year-over-year decline. The company is looking to increase profits and revenue through a fight against adword sharing and an ad-based model. In the former case, the process is lengthening, and the advertising business is likely to slow down, according to estimates. Subscriber growth has slowed considerably, and the approaching summer period, combined with the possible delayed effect of the economic downturn, may suggest that it will be hard for the company to grow at a surprisingly robust pace – not least because of competition.

Netflix (NFLX.US) shares, D1 interval. RSI near neutral 50 points signals that the company’s shares are ready for a spike in volatility. After a weak quarterly report, bears may come to the fore. Key supports could be the resistance line, which runs around $300 per share, and the SMA200, at $280. Falls below these levels could herald a deeper and more prolonged deterioration in sentiment. Source: xStation5