Netflix Earnings Show Lower-Than-Expected Subscriber Losses for Q2 2022

Netflix (NFLX) posted its second streaming subscriber net loss ever in the second quarter, although net losses of 0.9 million came in well ahead of the guidance of 2.0 million losses. Management expects to gain a million subscribers in the third quarter, well below our previous projection. The firm plans to trial its ad-supported model in early 2023 in a few key markets. We still don’t believe these plans are likely to show up in the U.S. in the near term as we think that the lower-priced offerings will be first introduced in smaller markets much like the password-sharing plans are be trialed in South America. We retain our $280 fair value estimate.

Netflix’s streaming base fell for the second time ever (and the second quarter in a row), ending the quarter with 220.7 million global paid subscribers, down from 221.6 million last quarter and up from 209.2 million a year ago. Net losses in the second quarter were in the United States and Canada, or UCAN; and Europe, Middle East, and Africa; with Asia-Pacific adding 1.1 million for the second quarter in row. UCAN has now lost almost 2 million subscribers in 2022, which more than erases the 1.3 million it added in 2021. Over the last 24 months, Netflix has added fewer than 380,000 subscribers in its largest and most profitable region.

Revenue of $7.8 billion was hit by foreign exchange headwinds. UCAN revenue improved 9% year over year as the price hike in 2021 helped average revenue per user, or ARPU, grow 10% versus a year ago to $15.95. We expect ARPU to continue to rise in the third quarter as the firm rolled out higher pricing for all three tiers in March. However, we also project the region will lose subscribers over the second half, limiting revenue growth. Given the high penetration in the U.S. and increased competition, gaining the marginal subscriber is becoming tougher. As a result, price increases may be the only real lever left to grow revenue in the U.S., with further increases likely causing churn to spike.