The streaming giant, Netflix, will be the first of the FAANG clan to unveil its Q1 financial figures on Tuesday, April 18, after Wall Street’s closing bell. Although Netflix suffered a dramatic slowdown in its subscriber figures after the global recovery from the Covid-19 pandemic and posted its first quarterly subscriber loss in 10 years, it managed to regain investor trust on hopes that management’s restructuring plans and initiatives could flip things around. Will the ad-supported tier live up to expectations?

Mild rebound after devastating year

Following a period of exponential growth, which accelerated during the Covid-19 pandemic, Netflix experienced a significant slowdown in net subscriber additions since late 2021. Furthermore, after being the sole player in the industry for quite some time, competition intensified significantly, with Disney, Amazon, Warner Bros and others launching their own streaming platforms to compensate for losses from their on-site activities that remained closed for approximately 1.5 year. The combination of those developments led to Netflix’s first quarterly subscriber loss in 10 years, while earnings fell for the first time in seven years.

However, these disappointing results forced Netflix to shake up its business and proceed with groundbreaking changes in its strategy in an attempt to reignite subscriber growth and increase monetisation of its services. Investors cheered that news, which translated into a strong rebound in the firm’s stock price, while in 2023 the anticipation of lower interest rates after the turmoil in the banking sector gave an extra boost to tech companies. Apart from that, the streaming giant has already delivered some indications that its restructuring has paid off as in the last quarter of 2022 it added 7.66 million subscribers against analysts’ projections of 4.5 million additions.

Performance of newly launched projects eyed

In response to the increasing number of headwinds, the streaming giant launched an ad-supported segment last November, in partnership with Microsoft, which would enable customers to access its business at a lower fee. Hence, Netflix killed two birds with one stone as on the one hand it entered the continuously expanding digital advertising market, while it also diversified its revenue streams that previously stemmed solely from memberships. This is the first full quarter that Netflix’s ad-supported service functioned, so investors will be eagerly awaiting to examine its performance.

Furthermore, the company has repeatedly stated that it plans to restrict account sharing even more as it estimates that nearly 100 million users are enjoying its services without paying. The upcoming results will exhibit whether this policy had a positive outcome as some analysts believe that being too restrictive might lead to cancellations.

Restructuring and fresh initiatives weigh on earnings

The entertainment powerhouse has spent a lot of cash in recent quarters for the expansion and diversification of its business operations and this can also be reflected in its fundamentals. For the first quarter of 2023, Netflix’s earnings per share (EPS) are expected at $2.85, which would represent a 19.2% decline from the same quarter last year. Meanwhile, revenue is anticipated at $8.17 billion, marking a minor 3.90% increase on an annual basis.

The firm’s operating and profit margins are also expected to decline due to the amounts spent for business restructuring, but those figures are expected to improve later in the year as those investments will start paying off. Additionally, from this quarter onwards, Netflix has stopped providing guidance on subscriber additions, which could lead to high volatility after the earnings announcement, as they tend to be interpreted differently from different investors.

Netflix is valued as the king of the sector

At current levels, Netflix’s valuation suggests that investors continue to bet both on the firm’s status within the streaming sector and its long-term growth prospects. Although its share price has been trading significantly lower from its all-time highs, the prolonged rebound since the third quarter of 2022 has pushed its valuation higher than that of major US benchmarks.

Specifically, the 12-month forward price-to-earnings ratio, which denotes the dollar amount someone would need to invest to receive back one dollar in annual earnings, currently stands at 27.1x, appearing relatively inflated compared to heavy-tech Nasdaq’s figure of 25.7x.

Key levels to watch

Taking a technical look, Netflix’s stock got beaten down in 2022, losing more than 50% of its value and generating a five-year low of 161.40. However, the share price started recovering since the third quarter of 2022 due to management’s announcements of new promising projects, while in 2023 the downshift in interest rate expectations enabled the extension of this rebound.

In the short-term though, the price came under a renewed wave of downside pressures, temporarily falling beneath its 50-day simple moving average (SMA) and the lower boundary of its upward sloping channel before managing to reclaim both barriers.

Therefore, if earnings surprise to the downside, the stock could fall again below its 50-day SMA and retreat further towards the $320.00 hurdle. Should that barricade fail, the attention could shift towards the 2023 bottom of $286.00.

Alternatively, an upbeat earnings announcement could propel the price towards the recent rejection region of $350.00, a break above which may bring the 2023 peak of $379.00 under examination.