Netflix earnings: What to expect on ads, subscriber growth, and more

Yahoo Finance's Allie Canal previews the good, the bad, and the ugly expected from Netflix earnings.

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BRIAN CHEUNG: All eyes are on Netflix ahead of the company's second quarter earnings next week. But as the streaming awards heat up, what can Netflix expect going forward? Yahoo Finance's Alexandra Canal joins us now to break it down. Again, it's next week, but it's very important earnings, given the miss that they had on subscribers last quarter. What are you watching?

ALEXANDRA CANAL: That's right, Brian. Investors are bracing for impact on the heels of this earnings report. Netflix said it expects to lose an additional 2 million subscribers in the second quarter. So let's break down the good, the bad, and the downright ugly ahead of next week's earnings. Let's start with the good since we're optimists here at Yahoo Finance.

Number one, their upcoming ad-supported tier. That's expected to hit the market at the end of this year. We got the news yesterday that Netflix has chosen Microsoft as its partner to help roll this out. Morgan Stanley analyst Benjamin Swinburne said in a new note that tapping this opportunity should help drive average revenue per unit growth with less reliance on consumer price increases.

Another benefit for Netflix is its strong slate of original content. "Stranger Things," "Squid Game," all broke records, all up for Emmy's this year. And that should continue to lure in new users and maintain existing ones as well.

And then, finally, Netflix seems to be more carefully thinking about costs and adjusting their overall spend. We saw two big layoffs recently, 150 workers cut in May, 300 jobs slashed in June, and job postings at an all-time low. So although unfortunate for those workers, it was necessary to Netflix to really stabilize that free cash flow, which we know is increasingly important to investors.

Now, let's get a little bit more pessimistic, the bad things that we have to watch for Netflix. We have potential peak subscriber penetration approaching in the US and Canada. That's contributed to lower price targets, bearish sentiments from analysts in regards to that subscriber growth. And related to that, foreign exchange a big weak spot for Netflix as $1 remains incredibly strong relative to other currencies. Bank of America estimates that Netflix could see about $267 million worth of FX headwinds to revenues in the second quarter, so something to watch there.

And then, finally, the ugly-- recession vulnerability. That continues to remain a risk that could worsen consumer sentiment, increase churn, and limit the pricing power of Netflix, which we know operates at a premium relative to their competitors, and that competition, right, that's greatly increased over the last few years. And that could limit growth in new markets and possibly cannibalize Netflix when they roll out that ad-supported tier. So, some good, some bad, but certainly a lot to watch for next week.