Netflix (NFLX) studies Q2 earnings after the bell on Tuesday — and buyers are bracing for impression.

The streaming large stated it expects to report a lack of 2 million subscribers for the second quarter after saying an surprising first-quarter subscriber loss of 200,000 customers in April.

Netflix inventory, presently buying and selling at round $180 a share, has plummeted 70% year-to-date amid a broader market sell-off that is slammed progress shares and fueled speak of a possible recession.

Here is the great, the dangerous, and the downright ugly relating to Netflix forward of subsequent week’s earnings.

The nice

Netflix’s upcoming ad-supported tier, coupled with a crackdown on password sharing, ought to assist enhance revenues because the platform grapples with a post-COVID droop in subscribers.

The streaming large will accomplice with Microsoft (MSFT) to assist roll out the brand new providing, which is predicted to hit the market later this 12 months (though some analysts assume in any other case given Microsoft’s lack of expertise within the third-party advert tech enterprise.)

Nonetheless, Wall Road is mostly bullish on advertisements.

“Tapping into the $160bn world video promoting spending alternative in the long run ought to permit Netflix to drive common income per unit (ARPU) progress with much less reliance on shopper value will increase,” Morgan Stanley analyst Benjamin Swinburne emphasised in a brand new word.

He added, “In markets with excessive advert ARPUs, just like the U.S., Netflix can supply a materially decrease priced providing and unlock extra internet provides with out sacrificing unit economics. Promoting may additionally show a consumer-friendly strategy to monetize password sharing.”

Swinburne, who lowered his value goal on the inventory from $300 to $220 a share, revealed that the financial institution might want to see internet provides reaccelerate, along with indicators of traction from promoting and password sharing monetization over the subsequent 12 months with the intention to revert again to a $300 bull case.

All in all, the analyst stated ARPU progress issues greater than internet provides, suggesting Netflix will proceed to lift costs down the road, along with leaning on income generated by ad-supported.

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Netflix’s robust slate of unique content material — from “Stranger Issues” to “Squid Sport” — ought to assist the platform entice new customers and keep current ones.

“Stranger Issues” season 4, along with breaking the document for Netflix’s largest ever premiere weekend, earned the very best viewership amongst all English-language Netflix seasons, with 930.three million hours seen in its first 28 days.

Nonetheless, the Duffer Brothers’ manufacturing was not in a position to eclipse South Korean smash hit “Squid Sport,” which nabbed 1.6 billion hours over that very same time interval.

Each titles obtained a slew of Emmy nominations this 12 months, together with a finest drama nod for “Squid Sport,” which is able to battle award present darling “Succession” for the highest prize.

Different originals like “Bridgerton,” “The Witcher,” “The Umbrella Academy,” and “You” additionally contributed to important spikes in world viewing following their respective premieres — one other signal that content material continues to be king for streamers.

Amid shrinking subscriber progress, Netflix has begun to trim prices and concentrate on expense administration — a optimistic with reference to free money move, which buyers have incessantly criticized.

Job postings for the corporate are at all-time lows — down 55% year-over-year, in keeping with Thinknum information, cited by Financial institution of America.

In June, the corporate laid off round 300 workers to fight “slower income progress.” The job cuts adopted Netflix’s final spherical of layoffs in Might when the streamer laid off 150 members of its workforce.

Financial institution of America stated Netflix’s most up-to-date layoff announcement means that “the corporate could also be starting to regulate its content material price focus as a way of right-sizing bills (e.g., chopping workers from area of interest programming/content material exploration).”

The Unhealthy

Financial institution of America expects subscribers to peak within the U.S. and Canada in three years with 80 million customers, whereas worldwide subscribers are estimated to hit 220 million in 18 years.

Potential peak subscriber penetration has contributed to cheaper price targets and bearish sentiments from analysts with reference to subscriber progress.

Many have cautioned that, if the U.S. saturation level approaches extra rapidly than anticipated, it may lead to a serious draw back danger, particularly amid elevated competitors.

FX pressures proceed to trigger issues for Netflix.

Financial institution of America stated it expects “International Alternate (FX) to creep additional into the discourse because the greenback reveals no near-term indicators of weakening relative to the general basket of currencies.”

The financial institution estimates that Netflix may see about $267 million of FX headwinds to revenues within the second quarter, noting that ARPUs in developed markets have decreased -4.4% to $13.16 whereas rising markets slipped -4.0% to $9.47 when in comparison with the financial institution’s final test on April 15.

The Ugly

“Streaming video revenues might show extra susceptible than anticipated to a world recession and decrease shopper spending ranges,” Morgan Stanley’s Swinburne stated in his word, citing the streamer’s pricing premium as a internet damaging for purchasers seeking to trim their streaming invoice.

Financial institution of America added {that a} recession situation may drive increased subscriber churn and/or restrict pricing energy — each main dangers to the draw back.

Competitors, which has intensified over the previous few years, continues to place upward strain on churn — and will even derail Netflix’s promising ad-supported plan with Disney+ (DIS) additionally set to roll out its personal ad-supported tier by the tip of this 12 months.

In line with current information, cited in a word by Financial institution of America, clients throughout all earnings ranges would change to a reduced ad-based different — nonetheless, “ad-tiering may function a means for shoppers throughout all earnings brackets to increase their streaming finances by buying and selling right down to subscribe to an extra service, benefiting Netflix’s rivals way more than Netflix itself.”

Moreover, competitors may doubtlessly restrict progress in new markets, which Netflix might want to depend on as soon as peak penetration hits the U.S.

Alexandra is a Senior Leisure and Meals Reporter at Yahoo Finance. Comply with her on Twitter @alliecanal8193 and electronic mail her at alexandra.canal@yahoofinance.com

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