To be honest, Wall Street probably doesn’t care that much what numbers Netflix reports as earnings season kicks off on Tuesday. What investors want to see, analysts say, is that the streamer’s efforts to reignite growth — in a new ad tier and a crackdown on password sharing — are paying off.
“Following strong subscriber growth numbers at the end of last year, it will be important to see what momentum Netflix was able to carry into 2023,” Third Bridge analyst Jamie Lumley told TheWrap. “The first quarter of the year has historically been weaker for subscriber growth, but with recent price hikes from competitors like Disney and Warner Bros Discovery, Netflix may have had the opportunity to pick up more subscribers.”
Analysts are expecting Netflix to report earnings of $2.81 per share, down from $3.53 per share in the first quarter of 2022, on revenue of $8.1 billion, up from $7.8 billion in the year-ago quarter, according to a Zacks survey. The first quarter of 2022 was when Netflix revealed a loss of 200,000 subscribers, its first drop in a decade. Those results jarred investors, and the stock dropped 24% in a day following the earnings report.
As of the end of 2022, Netflix reported a total of 230.8 million subscribers globally. Though the company no longer provides subscriber guidance, it predicted “modest positive paid net adds” in the first quarter of 2023, but fewer than the fourth quarter of 2022, when it added 7.66 million subscribers.
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In November, Netflix launched its $6.99 per month Basic With Ads tier, which has reportedly reached 1 million users. Lumley noted that the streamer’s initial goal of gaining 40 million ad tier subscribers by the end of 2023 is “increasingly unrealistic, with totals in the 10 million-20 million range far more likely.”
Additionally, the company’s executives previously said the company would embark on a controversial password-sharing crackdown, which it would expand “more broadly” during the first quarter of 2023. The company has estimated that 100 million households globally are sharing passwords, including 30 million in the U.S. and Canada.
In March 2022, Netflix began testing an add-a-member feature in Latin America, charging users $2.97 a month in Chile, $2.99 in Costa Rica and $2.09 in Peru. In August, it also unveiled an “add a home” option, which asked users to pay an extra monthly fee if they stream through a TV or TV-connected device located outside a primary household. The fee was $1 per month in Argentina and $2.99 per month in the Dominican Republic, Honduras, El Salvador and Guatemala. In February, the add-a-member feature was expanded to Canada, New Zealand, Portugal and Spain. Subscribers are being charged $8 per month in Canada and New Zealand, 4 euros or $4.37 per month in Portugal and 6 euros or $6.56 per month in Spain.
Another area to watch is Netflix’s quiet expansion into games, playable on iOS and Android smartphones and tablets. Lumley called video games a “key area to pay attention to this quarter.”
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Jeffries, which has a buy rating on the stock and $415 price target, estimates that Netflix’s controversial password-sharing crackdown and the ad-supported tier will help the company reaccelerate towards double-digit revenue growth by the end of 2023 and well into 2024. The company’s shares have traded between $294 and $368 this year, closing Monday at $332.72.
“We’re still very early in both [advertising video on demand] and paid sharing, but any commentary on conversion, churn and/or adoption of the new offerings is more important to our thesis than [first quarter] results,” the investment firm wrote in a note to clients on Thursday.
The company expects investors to battle “a lot of noise” in the second quarter ahead of the upside and are being “very conservative” in their modeling of churn in response to the password crackdown.
“We believe most of that churn will be somewhat impulsive, as it has minimal impact on the existing subscriber, and those members will return to the service over the course of 2023,” Jeffries added. A crackdown on password sharing, in other words, might annoy people getting Netflix for free, but won’t likely affect the customers who actually pay for the subscription.
Macquarie Research analyst Tim Nollen, who maintains a neutral rating on Netflix stock with a $350 price target, estimates that Netflix could gain anywhere from $1.1 billion to $3.5 billion in incremental revenue from its efforts to limit password sharing.
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Also bullish about Netflix’s paid sharing efforts is Wells Fargo analyst Steven Cahall.
“We think extra member pricing is higher than expected at ~+$8/mo, while recapture of cut-off sharers is also providing a benefit to gross adds/net adds,” he told clients in a research note on Thursday. “U.S. implementation feels a bit delayed, but we think that will feed incrementally bullish comments from management about the sub/revenue opportunity.”
Cahall, who has an overweight rating and $400 price target on Netflix stock, added that the bank expects Netflix to expand into “modestly-priced live content such as news, wrestling, MMA, etc.” which will grow the company’s total addressable market. The company has recently tested the waters of live programming with its “Love is Blind” Season 4 reunion special — though that was marred by a technical outage — and “Chris Rock: Selective Outrage.”
Wedbush Securities analyst Michael Pachter, who maintains an outperform rating on the stock with a $410 price target, believes Netflix is “well-positioned in this murky environment as streamers are shifting strategy, and should be valued as an immensely profitable, slow-growth company.”
“Even while ads are not yet directly accretive (and we think they will be increasingly accretive over time), the ad tier should continue to reduce churn and draw new subscribers to the service. We saw late in 2022, and expect this to continue to drive a reacceleration of subscriber growth,” Pachter wrote to clients on Thursday. “This should contribute increasingly to free cash flow generation as Netflix continues to improve its content quality and lower overall spend per subscriber. Additionally, our bias is that Netflix can drive profitability higher as it begins to address password sharing.”
Wedbush also anticipates that Netflix will continue to rein in spending by producing fewer feature-length films and focusing on lower-cost television content.
“This focus on lowering content costs leads us to conclude that Netflix can grow its revenues faster than its [operating expense], resulting in outsized profit and free cash flow growth in the coming years,” Pachter added. “We are modeling free cash flow to roughly double in 2023 and to grow at a more modest $1 billion annual rate thereafter.”
Shares of Netflix have see-sawed this year, rallying after the company’s announcement of fourth-quarter earnings in January, falling in February, and rising again in March. The stock is up 12% since the beginning of the year.
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