Netflix Profit Could Plunge as Ad-Supported Plan Fails to Take Off

Netflix Inc. (NFLX), the world's largest streaming service, will probably say profit plunged in the fourth quarter alongside the firm's weakest-ever revenue growth as intensifying competition and rising costs take their toll.

The streaming giant is expected to report net income of $186.3 million, the lowest in four years, as earnings per share (EPS) fell by two thirds to $0.44, according to estimates from Visible Alpha. Revenue probably inched ahead by just 1.5% to $7.8 billion. In the prior-year quarter, revenue rose 16%. Netflix reports results after markets close on Jan. 19.

Netflix's financial struggles underscore the company's difficulty navigating headwinds including fierce competition from Apple Inc.'s (AAPL) Apple TV+, Walt Disney Co.'s (DIS) Disney+, Amazon.com Inc.'s (AMZN) Amazon Prime Video, and other streaming services; dampened customer spending in a period of inflation; and mounting production costs. Netflix expects to spend roughly $17 billion annually over the next few years to develop content.

Data analysis firm Parrot Analytics says worldwide demand for new streaming entertainment has stopped rising, putting services like Netflix in a difficult position. To address the few remaining corners of the market left unexplored, the company plans to crack down on password sharing between users early this year. It also launched an ad-supported plan last year at a reduced price. Analyst Jamie Lumley of Third Bridge said the new plan hasn't achieved subscriber targets, though, because "the pricing is not necessarily significantly below the competition."

Netflix shares climbed in recent weeks but dropped 36% in the last year, almost triple the 13% decline in the S&P 500 Index.

Source: Visible Alpha

The Key Metric: Global Streaming Subscribers

Netflix's global paid streaming memberships represent the number of global users who paid for a subscription to receive streaming services. Memberships have long been Netflix's primary source of revenue. Almost 80% of people in the U.S. already have at least one streaming account, though, so Netflix may be approaching the upper limit of domestic subscribers. The company said Tuesday it will release its biggest-ever slate of South Korean content this year, underscoring its intensifying pursuit of market share abroad.

Analysts expect Netflix will claim 227.6 million subscribers as of the fourth quarter of 2022. This figure is 2.6% above the prior-year quarter's subscriber base, representing the smallest-ever increase. The company's global subscriptions have hovered between 220 million and 223 million for the last four consecutive quarters.