With Netflix Implied Volatility Skew at the Third Most Bearish Level in a Year, Here Is the Only Number That You Should Focus On Today [Updated With Earnings]


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Gone are the days when Netflix shares were scaling a seemingly endless upward ramp, fueled by the pandemic-induced tailwind of millions of people regularly tuning in to binge-watch the streaming giant's assorted library of content. Now, with the stock hammered by increasing competition and a declining subscriber base, Netflix investors are anxious ahead of today's Q2 2022 earnings announcement.

As a refresher, Netflix had lost subscribers in Q1 2022 – the first time this occurred since 2012. To wit, the company had disclosed a net decline of 200,000 in its subscriber base against the previous guidance of 2.5 million net additions. Of course, a large part of this decline occurred as the company wound down its operations in Russia, resulting in a one-time loss of 700,000 subscribers. Without this externality, the company would have reported a growth of 500,000 subscribers. Nonetheless, the real shocker was the company's guidance for Q2 2022, projecting a loss of around 2 million in its subscriber base.

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Netflix's most loyal customers are bailing on the platform. For instance, as per the data from Antenna, an analytics firm that anonymously gathers data on the streaming habits of millions of Americans, loyal Netflix users – described as those retaining an account with the streaming service for over three years – accounted for 13 percent of cancellations in the first quarter of this year. Should this trend continue, it would mark a terminal decline in Netflix's monetized pool of subscribers.

Of course, to counter this growing headwind, Netflix is reportedly working to introduce a cheaper, ad-supported subscription tier. Moreover, the company has reportedly shifted its content-creation focus from quantity to quality. Here, the streaming giant has witnessed some success. For instance, the fourth season of Stranger Things recently became the first English-language original series to cross 1 billion viewing hours within 4 weeks of its debut.

Nonetheless, with Apple TV Plus continuing to offer acclaimed, high-quality shows, Netflix faces an uphill battle going forward.

This brings us to the crux of the matter. The fear in the market, as measured by the market's propensity to accord a higher value to put options over call options, is currently at the third-most-extreme level in the past 1-year period. To wit, the 30-day 25-delta implied volatility skew between Netflix puts and calls is currently at +9.7, just shy of the 1-year high bearish reading of +10.7 recorded on the 13th of June.

Source: https://marketchameleon.com/Overview/NFLX/VolatilitySkew/

Accordingly, investors are only expected to focus on Netflix's subscription number today.

Netflix shares are currently down nearly 70 percent on a year-to-date basis. For comparison, the broader S&P 500 index is down only around 20 percent.

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Update: Netflix Announces Q2 2022 Earnings

Netflix has disclosed a net decrease in its subscriber base of 970,000. Bear in mind that the company had previously provided a guidance of a net decrease of 2 million in its subscriber base. Crucially, Netflix now expects to grow its subscriber base by 1 million in Q3 2022.

The snippet above summarizes key figures from Netflix's latest quarterly earnings.

Netflix shares are currently up nearly 6 percent in after-hours trading.

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