Netflix Q2 Reaction: When Losing Is Winning

Netflix Q2 Reaction: When Losing Is
Cheyne Gateley/VIP+

Looked at in a vacuum, the Q2 results Netflix reported Tuesday were ghastly. For the first time ever, Netflix lost subscribers for two consecutive quarters. And the 970,000 represented the biggest loss the company has ever reported.  

But it was a rare case of bad news being good news for the beleaguered company, which saw its stock surge 8% in the after-hours session. Fortunately, the 970,000-subscriber loss in Q2 was better than the 2 million loss previously projected by the company in April.  

And though the subscriber growth rate is still decelerating, Netflix forecasted a return to growth in Q3, when it expects to add roughly 1 million global paid subs in the current quarter.  

Basically, Wall Street gave Netflix a nice pat on the back because while the numbers were bad, it wasn’t THAT bad. Which is good.  

It's been a rough three-month period for Netflix, but it hasn’t exactly been a great year for stocks broadly. Nevertheless, Netflix was being punished even more than the rest. Not including Tuesday’s after-hours move, Netflix shares cratered nearly 70%, while the broader market sank roughly 18% during the same time period. 

If there’s one thing to give kudos to Netflix about, it’s not scared to be transparent. Sure, the company’s forecast for Q2 was probably modest in order to keep expectations at bay, but at least the warning of more pain ahead before a return to gain was an accurate reflection. And now we know it was just a major bump in the road as opposed to anything long-term. 

Netflix just got too comfortable on its throne reigning over the streaming landscape, and it has certainly made some mistakes. It clearly underestimated the rising competition, it was late to the game with an ad-supported offering, which it now says will roll out in the beginning of 2023 as opposed to late 2022 in partnership with tech behemoth Microsoft, and it was too lax with password sharing. 

So while investors may be breathing a sigh of relief after better-than-expected Q2 results, the real test actually lies ahead. 

The Netflix story is much bigger than just Netflix. To put it bluntly, the streamer serves as a barometer for the overall streaming space. And with its impending leap into the ad-supported world, that holds even more true. There’s no denying that the opportunities are still abundant for Netflix, but there is no guarantee that the company will deliver on all fronts. 

There are many headwinds, but the biggest headwind is out of Netflix’s control. The economic environment isn’t exactly making things easy, not just for Netflix but for most. We are headed into another era of major uncertainty, as global economies are being shaken with worry of a potential recession. Though entertainment, and particularly streaming, generally tends to hold up well in recessionary times, not all recessions are the same, and consumer behavior is even more challenging to predict.  

The difference between now and just a couple years ago is that Netflix is just one of a slew of streaming options, and it’s also the most expensive on the market right now. An exclusive survey between VIP+ and Morning Consult found that Americans are already cutting back on entertainment spending as a result of rising inflation. If that’s an indication of what lies ahead, it could mean serious trouble for Netflix and the rest of the streaming gang. 

Through all the tumult of this year, Netflix management and CEO Reed Hastings may not exactly be feeling comfortable. But this period of discomfort might be the best thing to happen to the legendary company. Proper regrouping and restrategizing could give birth to Netflix 2.0, and we could very well see a better company on the other side.  

How Netflix weathers the next six months to a year will play an even more critical role in how Netflix is valued going forward, both as a company and as a stock. As Hastings said on the earnings conference call, “Tough in some ways losing a million and calling it success, but we’re set up very well for the next year."