Netflix has announced a partnership with Microsoft for its ad-supported version. The company has been against the ad-supported platform but changed its mind after it lost subscribers in the first quarter of 2022 for the first time in a decade.

Netflix stock has been in freefall this year. While the stock soared yesterday after announcing a deal with Microsoft, it is still down over 70% for the year. The stock is the worst performing S&P 500 stock and many analysts are now questioning its very inclusion in the FAANG pack.

Meanwhile, after the spike yesterday, Netflix stock is trading lower today amid the broader market sell-off. JPMorgan’s second-quarter earnings release isn’t helping matters for markets as America’s largest bank issued a grim warning on the economy and also suspended its stock buyback program.

Coming back to Netflix’s deal with Microsoft, the company’s COO Greg Peters said “Microsoft has the proven ability to support all our needs as we together build a new ad supported offering. More importantly, Microsoft offered the flexibility to innovate over time on both the technology and sales side, as well as strong privacy protections for our members.”

Notably, Netflix lost 200,000 subscribers in the first quarter. While it added subscribers in Asia, it lost users in the lucrative North American market. The company also exited Russia in the quarter which took a toll on its total subscriber base.

To make things worse, it said that it would lose 2 million subscribers in the second quarter. Markets would watch out for the commentary on subscriber growth outlook when Netflix reports its second-quarter earnings next week.

Netflix is Looking at Ways to Revive Growth

In order to revive its sagging growth, Netflix said that it would crack down on password sharing, adding that it estimates 100 million households globally watch its content on a shared password.

Through the ad-supported platform, Netflix can lower the price for users which would especially help it win over value-conscious users in emerging markets like India. The company is also reportedly looking at another season of its popular Squid Games. Last year, it added millions of subscribers globally cashing on the show’s popularity.

Netflix has double trouble at hand. On the one hand, it has to invest in new content to win new subscribers. On the other hand, the company also has to protect its margins. It has canceled some shows including Pearl, which was an animated series created by Meghan Markle. The streaming company is also shutting down the Tudum website which carried behind the scene action.

Netflix has been facing stiff competition from other streaming companies including Disney. The company now has to look at ways to not only retain but also acquire new subscribers. Many are speculating whether the company would have a relook at its binge-watching model as it makes it easier for people to leave the platform after watching their favorite show.

Wall Street Analysts Have been Turning Bearish on Netflix

Until last year, most Wall Street analysts recommended Netflix stock as a buy. However, amid the recent troubles, many analysts have downgraded the stock. Needham even doubts that the company can win the streaming war even with its ad-supported platform.

The streaming war has been heating up and Disney has added millions of subscribers since it launched Disney+ in the second half of 2019. In the hindsight, the launch was timed well as streaming companies saw tremendous growth in 2020 because people were struck at homes due to the COVID-19 restrictions. While Disney has continued to add subscribers, including the most recent quarter where Netflix lost subscribers, Netflix admitted to having peaked in several key markets.

While the Federal Reserve’s rate hikes have been putting pressure on growth stocks, Netflix’s troubles are much deeper rooted. It needs to revive growth while also protecting its margins, something not many analysts believe it can do. Even Bill Ackman, who had bought the dip in Netflix after the Q4 2021 earnings miss, sold the stock after the Q1 2022 earnings, incurring millions of dollars in losses.

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