Netflix: More Downside Potential Following Bearish Guidance?

Netflix, Inc. (#Netflix), an American subscription streaming service and production company, is set to report its Q2 2022 earnings on 19th July (Tuesday), after market close. During the current unfavourable macro-economic environment, Netflix has been among the worst performing stocks on the S&P 500 index.

In general, inflation, supply chain disruptions, rising interest rates and the threat of recession shall continue to hurt tech stocks. Following Russia’s invasion of Ukraine, Netflix ceased its operation in Russia, resulting in the company shedding a net 700,000 accounts, its first quarterly loss of subscribers in a decade. This caused the Netflix share price to tank 35% and tens of billions of its market capitalization was wiped off in a single day. Other factors that served as headwinds to the company growth include increased competition, high household penetration and account sharing.

Fig 1:Number of Netflix Paid Subscribers Worldwide. : Statista

The management has provided a disheartening guidance for the upcoming quarter, with expectations that paid memberships shall reduce by -2 million to 219.64 million.  According to Zacks Consensus Estimate, the figure is estimated to drop -1.7 million to 219.94 million, solely based on the company’s utilization of pricing power to offset subscriber losses. Besides the number of subscribers, other issues that concern the investors include the details of Netflix’s partnership with Microsoft in its ad-supported plan. A successful strategy could inevitably help to combat falling subscriber numbers, and vice versa.

Fig 2:Reported Sales and EPS versus Analyst Forecast for Netflix money.cnn

Estimations for reported sales in the upcoming earnings announcement stood at $8.0B, up +1.27% from the previous quarter and +9.59% from the same period last year. On the other hand, consensus estimates for earnings per share (EPS) stood at $2.96, down -16.15% (q/q) and -0.34% (y/y) respectively. Netflix has been ranked #4 (Sell) by Zacks.

Technical Overview:

In the bigger picture, all pandemic gains of #Netflix shares have been erased since the sell-off that started in mid November 2021, leaving an all-time high at $700.20. Currently, the company share price is traded slightly above the 52-week low ($162.48) and the low estimates of analysts ($150). These two levels serve as important support. $205 serves as a minor resistance zone to watch. The psychological level $250 and the lows seen in September 2019 ($252.22) serve as the next resistance zone, followed by the daily 100-SMA. Breaking above these resistance zones may indicate the bulls will continue the momentum towards the next resistance at $367.90 and $431.30.

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Larince Zhang

Market Analyst 

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