- Netflix shares jump 5% on confirmation of new subscription pricing
- Shares up nearly 40% since June
- What to expect from Q3 earnings on 18 October
After being a drag on investors’ portfolios for the first half of 2022, Netflix (NFLX:NASDAQ) is shining bright once again. The company’s share price has risen by nearly 40% from its June low, and it’s just enjoyed another leg up after confirming the cost of its new cut-price subscription tier which launches on 3 November 2022.
WHY HAS THE SHARE PRICE GONE UP?
The 5% jump in the stock on the news (13 October) would suggest investors like the $6.99 pricing point (or £4.99 in the UK) as it’s cheap enough to achieve two important things.
First is to lure in more customers and reignite its subscription growth rate - something that’s been lagging of late, and the key reason why the shares slumped earlier in 2022.
Second is to improve the loyalty of existing customers. The cost-of-living crisis has raised the likelihood of many people cancelling their Netflix account. By offering them the chance to continue enjoying TV shows and films on the Netflix platform at a cheaper price, it might be enough to stop them leaving.
Reducing customer churn is important for the future of the company as one of the key attractions of a subscription-led business model is to get people so used to a service that they find it hard to leave.
Rival streaming provider Sky has for years relied on the power of its retention team to cut deals to stop customers cancelling their account.
IS A CHEAPER SERVICE GOOD FOR NETFLIX’S EARNINGS?
Having cheaper prices should help to boost revenue for Netflix and it is clearly chasing volume over quality of earnings for now.
Longer term it needs to make sure that customers don’t get too used to paying the cheapest amount possible. When economic conditions are more favourable, it will have to work hard at trying to upsell services and get people on a higher subscription tier. That would greatly enhance its profit margins.
Just remember, earnings are a greater driver for the share price than revenue - so the more money left in its pocket after paying costs, the greater the chance for a higher share price.
WHAT’S THE DOWNSIDE OF THE ADVERTISING SUBSCRIPTION TIER?
Anyone who has watched Sky’s NowTV streaming platform will know that advertisements before a show or film aren’t that much of a distraction. Where it gets more annoying is ads during the show or film as this disrupts the flow of the story. And that’s the big negative for Netflix’s proposition - it’s going to show an average of four to five minutes of adverts per hour.
This might be one way to stop all its customers from simply downgrading to the cheapest package, but it also takes some of the enjoyment out of putting your feet up and settling in for a couple of hours of uninterrupted entertainment.
HOW MUCH IS NETFLIX EXPECTED TO EARN?
While the share price has perked to life on the potential to breath new life into subscriber numbers, this could all change when the company reports its third quarter results on Tuesday 18 October 2022.
Analysts are looking for $7.837 billion in revenue, a drop from the $7.97 billion achieved in the second quarter, according to Refinitiv. Pre-tax profit is forecast to dip to $1.137 billion versus $1.623 billion in Q2. Reported earnings per share or EPS is expected to be $2.12 per share, down from $3.20 in the previous three-month period.
