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Netflix climbs as investors digest earnings, but analyst warns 'a lot remains to be figured out'

·Senior Reporter
·3 min read
In this article:
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After a hard start to the year, Netflix (NFLX) is finally enjoying some time in the green.

Shares of the streaming giant continued to surge on Tuesday — up more than 6% in late afternoon trading as investors digested the platform's Q2 earnings report, which showed subscriber losses coming in narrower-than-expected (-970,000 versus the estimated -2 million).

Despite the positive Wall Street reaction, however, "a lot remains to be figured out," Piper Sandler analyst Tom Champion told Yahoo Finance Live in a new interview.

"The big challenge for Netflix is executing and transition — they've got to get beyond their password sharing issues and they've got to introduce an advertising tier" to offset some of these subscriber losses, the analyst advised.

Netflix, which lost 200,000 users in April and revealed softer-than-expected guidance for Q3, has battled an uptick in subscriber churn, or the number of customers that drop off the service. That comes amid increased competition, with some industry watchers warning that a "streaming recession" is on the horizon. The streaming giant plans to introduce an ad-supported tier next year to ease some of these woes.

As growth slows, "the amount of subscribers may no longer be the paramount [key performance indicator] for a lot of these streaming services," said Anthony Palomba, professor of business administration at UVA’s Darden School of Business.

He suggested that the attention has now shifted to other forms of monetization like advertising.

Piper Sandler's Champion agreed, adding that the ad-supported tier will be "essential" for Netflix to get back to the subscriber growth cadence it's enjoyed in the past as the streaming giant approaches peak penetration levels in developed markets like the U.S. and Canada.

Still, a potential downside risk could be more subscribers trading down in favor of a new ad tier.

"The consumer is pinched — it's a trickier environment today than it was a year ago. Tiering down is probably going to be a reality," Champion admitted.

Netflix, which revealed last week that it's partnered with Microsoft (MSFT) to help launch a new ad-based tier, updated its timeline on when consumers can expect it to hit the market.

The platform now anticipates to debut the ad-based offering in the early part of 2023, adding that it will "likely start in a handful of markets where advertising spend is significant...our intention is to roll it out, listen and learn, and iterate quickly to improve the offering."

On its earnings call on Tuesday, Netflix's leadership team said they're taking an "innovation-oriented view" when it comes to ads, aiming to provide an "incredible" experience to consumers, brands, and advertisers alike.

UVA's Palomba emphasized that the personalized, data-driven ad experience will be key for Netflix, anticipating a "cutting edge" integration that will "starkly contrast" what's seen on linear television.

"Stranger Things" (Courtesy: Netflix)
"Stranger Things" (Courtesy: Netflix)

Champion also remained confident that advertisers will want to work with Netflix, citing its strong slate of original content and the amount of viewing hours the platform commands.

"There's going to be a lot of advertiser interest in advertising on Netflix," he said, adding that, although it will be a slow rollout, the ad-based offering will contribute significantly to profits.

Netflix COO and chief product officer Greg Peters hinted at this point during the earnings call, saying the company is "optimistic" that, on a unit economics basis, the ad supported viewer will be roughly equivalent to that of the current conventional subscriber.

As for the selection of Microsoft, Peters said bluntly, "We picked Microsoft as our ads partner because we think they're going to be great as an ads partner."

He added that the two companies plan to "work together, collaborate and evolve the technical capacity" of the ad experience — citing flexibility as a key component of the partnership.

Alexandra is a Senior Entertainment and Food Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com

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