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Earnings Watch: What does a mature streaming service look like? Netflix is about to show us

Netflix Inc. proved to the world that streaming video could be a big business. Now it will show the world what that business looks like when it hits maturity. Read More...

Netflix Inc. proved to the world that streaming video could be a big business. Now it will show the world what that business looks like when it hits maturity.

Netflix’s growth stage hit warp speed during the COVID-19 pandemic, then fell off in the first quarter after nearly a year of staggering growth. When the company reports second-quarter earnings on Tuesday, it has warned investors of the smallest number of net additions in its history.

While the stock plunged on that news three months ago, it should not have been surprising. Netflix has been giving hints that it was reaching the end of its early growth stage for years — from admitting that competition will take a bite to focusing more on international when U.S. growth slowed down to becoming cash-flow positive.

Netflix earnings preview: Can ‘The Witcher’ and other hot series lead Netflix to a second-half surge?

While analysts believe subscription additions will tick back up in the second half of the year, as new seasons of popular shows like “The Witcher” begin to air, it is unlikely Netflix will sport the type of subscriber growth investors have become used to. The fight is just getting harder as newer streaming services from the likes of Walt Disney Co., NBCUniversal and Apple Inc. add fresh content and continue to offer cheaper prices and free deals to woo new subscribers.

For more: Your streaming subscriptions reshaped Disney and turbocharged Netflix — now comes making more money off you

How does Netflix respond? Whatever co-CEOs Reed Hastings and Ted Sarandos do will establish what maturity looks like in streaming, and will need to generate growing revenue without counting on huge new subscriber additions to satisfy investors.

Netflix is expected to follow multiple paths.

  • Raising subscription prices. Netflix raised its prices in the U.S. late last year, at least the fifth time it has raised prices on the U.S. audience. The cadence — a little less than two years since its last increase, which came a little less than two years after the one before — suggests the company will look to next year for another hike. KeyBanc analysts agree, stating in a note that increases are “likely across geographies throughout 2022.”
  • Focusing on international growth. While Netflix made a big early push for international growth, new rivals are also pushing into those territories, so the company’s head start is dwindling. Netflix has found success with content made for those international audiences, and has even developed some shows that translate to global audiences, such as France’s “Lupin” and Spain’s “Money Heist.” As Wedbush analysts wrote, substantial growth will only happen with big international additions. “Netflix is approaching market saturation in North America, with its nearly 75 million members comprising around 60% of all households,” the analysts wrote, later adding “Netflix’s opportunities overseas remain compelling, and we think this will support high single digit percentage user growth for the foreseeable future.”
  • Adding new types of content. Netflix made one of its biggest moves yet in this direction just ahead of its earnings report, bringing on a seasoned videogame executive who is expected to develop games for the company as a way to avoid subscribers “churning,” or only paying for the service when there is content they want to see. If Netflix can add new types of content that will make the service “stickier” — podcasts have also been mentioned repeatedly by analysts — it could keep subscribers from leaving the service for good or for months at a time.

Expect Netflix executives to address all those potential avenues in Tuesday’s shareholder letter and earnings “conference call,” along with the information that could drive second-half performance and consumer interest — specific release dates for some of those hot shows.

For more context on the streaming boom and its effects on the traditional cable bundle, check out AT&T Inc.’s T report for information on dwindling cable subscribers and the company’s latest streaming gambit, a combination with Discovery Inc. DISCA

The number to watch

Airline … profits? Delta Air Lines Inc. DAL surprisingly reported a GAAP profit Wednesday morning, its first quarter in the black since the end of 2019, while analysts were looking for a loss of more than $800 million. Most surprising in the results and executives’ discussion of the results was a return from business travelers, when expectations were for a longer trajectory to a bounceback there as opposed to leisure travel. United Airlines Inc. UAL and American Airlines Group Inc. AAL are scheduled to report this week, and analysts expect both of them to lose between $700 million and $800 million on a GAAP basis. If they are able to pull a Delta and show profit, the trajectory to an airline recovery could change. Other airline reports include Southwest Airlines Co. LUV and Alaska Air Group Inc. ALK, which provided an early preview of its report.

The call to put on your calendar

Intel Corp. INTC Intel’s new chief executive, Pat Gelsinger, entered into a tense situation when he took the top job, but he has not been shy. Despite process-manufacturing issues that have plagued the chip maker for years, Gelsinger is promising to increase Intel’s manufacturing and even make chips for rivals. Amid that talk, a report late Thursday suggested that Intel is in discussions to acquire GlobalFoundries Inc., the former manufacturing arm of intense rival Advanced Micro Devices Inc. AMD While executives are unlikely to discuss specific talks with a potential acquisition target in the earnings call on Thursday, expect discussion of the manufacturing effort in general, as well as important commentary on the boom in personal-computer sales, which appears to be slowing down. Also look out for Thursday’s other chip report, from Texas Instruments Inc. TXN, for more readthroughs on the semiconductor shortage.

For more: Intel wants to buy AMD’s old chip-making business? How weird are semiconductor mergers going to get?

This week in earnings

Nearly a third of the 30 Dow Jones Industrial Average DJIA components and more than 80 S&P 500 SPX companies are expected to report in the week ahead. Performance so far this quarter has been strong, with 85% of S&P 500 companies beating expectations and none providing guidance lower than expectations so far, according to FactSet Research Senior Earnings Analyst John Butters.

Here are the coming week’s expected reports from the main indexes, according to FactSet. Notable reports outside the main indexes include Harley Davidson Inc. HOG on Wednesday and Snapchat parent company Snap Inc. SNAP on Thursday.

Dow Jones Industrial Average reports: International Business Machines Inc. IBM (Monday); Travelers Cos. Inc. TRV (Tuesday); Coca-Cola Co. KO, Johnson & Johnson JNJ, Verizon Communications Inc. VZ (Wednesday); Intel, Dow Inc. DOW (Thursday); American Express Corp. AXP, Honeywell Intl Inc. HON (Friday)

S&P 500 reports

Monday: IBM, J.B. Hunt Transport Services Inc. JBHT Prologis Inc. PLD, Tractor Supply Co. TSCO, Zions Bancorporation NA ZION

Tuesday: Chipotle Mexican Grill Inc. CMG, Citizens Financial Group Inc. CFG, Dover Corp. DOV, Halliburton Co. HAL, HCA Healthcare Inc. HCA, Intuitive Surgical Inc. ISRG, KeyCorp KEY Netflix, Omnicom Group Inc. OMC, Philip Morris International Inc. PM, PPG Industries Inc. PPG, Synchrony Financial SYF, Travelers

Wednesday: Anthem Inc. ANTM, Baker Hughes Co. BKR, Coca-Cola, Comerica Inc. CMA, CSX Corp. CSX, Interpublic Group of Cos. Inc. IPG Johnson & Johnson, Kinder Morgan Inc. KMI, Las Vegas Sands Corp. LVS, M&T Bank Corp. MTB, MarketAxess Holdings Inc. MKTX, Nasdaq Inc. NDAQ, Northern Trust Corp. NTRS, Seagate Technology Holdings PLC STX, Texas Instruments, United Airlines, United Rentals Inc. URI, Verizon

Thursday: Abbott Laboratories ABT, Alaska Air, Allegion PLC ALLE, American Airlines, American Electric Power Company Inc. AEP, AT&T, Biogen Inc. BIIB, Capital One Financial Corp. COF, Crown Castle Intl Corp. CCI, Danaher Corp. DHR, Discover Financial Services DFS, Domino’s Pizza Inc. DPZ, Dow, D.R. Horton Inc. DHI, Equifax Inc. EFX, Fifth Third Bancorp FITB, Freeport-McMoRan Inc. FCX, Genuine Parts Co. GPC, Globe Life Inc. GL, Intel, Marsh & McLennan Cos. Inc. MMC, Newmont Corp. NEM, Nucor Corp. NUE, Pool Corp. POOL, Quest Diagnostics Inc. DGX, Robert Half International Inc. RHI, Snap-on Inc. SNA, Southwest Airlines, SVB Financial Group SIVB, Twitter Inc. TWTR, Union Pacific Corp. UNP, VeriSign Inc. VRSN, W. R. Berkley Corp. WRB, Whirlpool Corp. WHR

Friday: American Express, Celanese Corp. CE, Honeywell, Kimberly-Clark Corp. KMB, NextEra Energy Inc. NEE, Regions Financial Corp. RF, Roper Technologies Inc. ROP, Schlumberger NV SLB, Ventas Inc. VTR

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