Netflix Earnings Preview: Bullish Wall Street Expects Progress on Password-Sharing Crackdown, Ad Tier
Amid Hollywood’s historic double strike, Netflix is on deck after the market close on July 19 with its second-quarter report that will kick off media earnings season and shed light on its subscriber momentum, the progress of its cheaper advertising tier and the impact of its password-sharing crackdown.
Popular second-quarter originals from the streamer have included the likes of Queen Charlotte: A Bridgerton Story. Heading into the financial and operating update, Wall Street has been bullish on Netflix shares, which gained over the first half of 2023 and are up more than 50 percent year-to-date.
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A slew of analysts has in recent days and weeks raised their price targets on the company’s stock. After all, one key theme across the Street is an expectation of positive updates on the progress of the firm’s password-sharing crackdown and advertising tier rollout.
“Investors (are) focused on sub trends and ramping monetization efforts when Netflix reports,” TD Cowen analyst John Blackledge wrote in a July 11 report. “Investors will look for updates on Netflix’s monetization efforts – paid sharing and advertising tier.” He has designated the streamer’s stock as one of his “best ideas” for 2023. “Netflix’s paid sharing coupled with the ad tier rollout should drive long-term revenue upside, and the launch of paid sharing in the second quarter of 2023 along with the ramping ad tier should help drive membership and revenue growth in the second half of 2023.” Specifically, the TD Cowen analyst forecasts net subscriber growth of 2.37 million in the second quarter, “versus consensus of around 1.7 million,” and a net gain of 12.1 million and “revenue re-acceleration” in the second half of 2023. All in all, Blackledge reiterated his “outperform” rating and $500 stock price target.
That same day, UBS analyst John Hodulik boosted his Netflix stock price target from $390 to $525, while maintaining his “buy” rating. “We see Netflix as the main beneficiary as peers prioritize profits in streaming,” he wrote and highlighted positive data points. “Netflix introduced paid sharing more broadly in the second quarter. As a proxy for potential churn, we monitored Google search interest in ‘cancel Netflix,’ which saw less inflection in key markets launched in the second quarter than what was observed in Canada/Spain in the first quarter,” Hodulik wrote. “We continue to believe paid sharing will drive 5 percent-plus uplift to revenue and see the roll-out as key to driving scale in advertising with the growth in the ad-tier mix and better targeting. Netflix eliminated its basic ad-free tier in Canada (and de-emphasized in the U.S.), which we estimate could provide a 10 percent uplift to average revenue per user over time and should help scale the ad base faster than prior expectations.”
All in all, the UBS expert raised his estimates and predicted second-quarter financials would beat management’s guidance, adding that he and his team “still expect accelerating second-half growth.” Hodulik now forecasts 3.6 million net subscriber gains in the second and 6.5 million in the third quarter, “bringing our ’23 estimate to 18 million (12 million prior; 9 million in ’22).” And he noted: “We expect third-quarter guidance to imply faster revenue and operating income growth, boosted by accretion from paid sharing.”
Evercore ISI analyst Mark Mahaney has also generally been a Netflix bull, having an “outperform” rating and $400 price target on the stock. But in the headline of a Monday report, he warned investors: “Tread Lightly Into Great (Subs) Expectations.”
“Buyside expectations in terms of net sub adds are almost certainly higher than (on the) Street, with the market likely looking for more like 4 million-5 million subs in the second quarter and a similar to higher level in the third quarter (5-7 million),” Mahaney wrote. “If the positive intra-quarter sub trends reported by third-party tracking services are accurate, these expectations appear reasonable. But we would view them as likely limiting the opportunity for upside surprise and increasing the odds of a negative surprise.”
Explained Mahaney: “Thus, we would prefer to buy Netflix shares after the (results) rather than before and have issued a tactical ‘underperform’ call on Netflix for the (results).”
The Evercore ISI analyst also pointed out that Netflix’s stock has exceeded his $400 price target, “and we removed it from our top picks list last month, but we are sticking with (an) ‘outperform’ rating on Netflix as we believe this stock still has legs.” He noted his bull case for Netflix, which includes its stock price possibly hitting $500 by 2024, “driven by an incremental 20-30 million subs growth from ’23 to ’25 from SAVOD (subscription ad-supported VOD) and paid sharing benefits.”
Many recent Netflix reports have focused on such bullish commentary. At the end of June, for example, Oppenheimer analyst Jason Helfstein also boosted his stock price target for Netflix by $50 to $500, while maintaining his “outperform” rating, “in anticipation of higher subscribers on bullish indicators for paid sharing and higher revenue/sub with potential discontinuation of lowest-priced ad-free plan.” He argued that the company could phase out its advertising-free “Basic” streaming plan, as it is currently testing in Canada, estimating such “a phase-out of the Basic plan could generate an incremental $4.4 billion for Netflix over a 12-month period.”
Helfstein also sees further potential upside for the company. “(An) extended writers strike would disrupt back-to-school TV calendar, likely pushing more users/viewing to Netflix, given it’s programming lead-time,” he wrote. “Netflix benefits from a deep backlog as well as international content that is unaffected by strike. Additionally, Netflix is likely benefiting from media job cuts, as competitors struggle amid ad market weakness and subscription services cash drain.”
For the second quarter, Helfstein raised his subscriber forecast from 234.2 million to 235.1 million, a gain of 2.6 million instead of 1.7 million.
Just on Thursday, July 13, Macquarie analyst Tim Nollen added his take on the latest financial and operating update: “Netflix’s earnings report on July 19 could be even more impactful than usual. Based on the stock’s second-quarter outperformance and several recent sell-side estimate and target price increases, the bar is already set pretty high.”
This fact “may well be justified,” he argued, pointing out that Netflix launched its $7.99 paid sharing plan in the U.S. in May, with early “positive” third-party readings on consumers’ response. “We expect the most important aspect of Netflix’s crackdown on password sharing will be the catalyst it creates to attract more users to its $6.99 ad tier base, in turn generating higher revenue from advertising, while both new plans bring higher average revenue per user,” Nollen concluded. “This may be partially offset by price cuts in over 100 countries, and on the earnings side, by costs associated with this rapid ad tier buildout.”
The Macquarie expert increased his 2023 and 2024 earnings estimates “as we layer in upside from our ad tier and paid sharing calculations,” leading him to boost his stock price target from $350 to $410 and speaking of a “potentially momentous” quarterly update. But Nollen maintained his “neutral” rating on Netflix shares, highlighting that he and his team will “await second-quarter results before assessing if further changes to numbers are warranted.”
Pivotal Research Group analyst Jeffrey Wlodarczak is the biggest Netflix bull on Wall Street, in June raising his stock price target from $425 to a Street high of $535 with a “buy” rating. “It remains well positioned to generate solid subscriber and revenue/free cash flow growth even in a potential global recessionary environment via their better monetization of the approximate 100 million-plus households that currently utilize Netflix outside of paying households via password sharing,” he explained. “This should be enhanced by the subscriber and subscriber monetization benefits from their ad-supported tier.” And the expert highlighted: “Importantly, Netflix, unlike its streaming peers, has demonstrated massive scale economies which is evidenced by the major ramp in free cash flow in ’22/’23, a trend we expect to continue ‘24” and beyond.
Another Netflix stock price boost, by $100 to $450, came on July 10 from Morgan Stanley analyst Benjamin Swinburne. “We are bullish on the Netflix business as continued execution, competitor withdrawal and disciplined expense trends increase our outlook,” he explained.
That said, he maintained his “equal-weight” rating on the stock, highlighting: “On a 12-month view, however, there may be more risk of multiple compression from here than multiple expansion and we wait for a better entry point.” Explained Swinburne: “A year ago, nothing was priced in for either paid sharing or the ad-tier as shares traded at about 13 times estimated 2024 consensus earnings per share. Today, at about 30 times, much is expected.”
But the expert also emphasized the bull case. “Netflix is poised to demonstrate how good a business streaming can be at scale,” he wrote. “The combination of accelerating revenue against limited expense
growth is set to improve returns.”
Meanwhile, Goldman Sachs analyst Eric Sheridan, in a July 4 report, upgraded Netflix from “sell” to “neutral” and boosted his stock price target from $230 to $400. “Strategic Initiatives Drive Operating Outperformance,” the former Netflix bear highlighted in the headline of his report, in which he also summarized: “Netflix continues to execute against its global password and ad tier initiatives.”
Sheridan noted that his “sell” recommendation had been based on the view that the global streaming giant “would face a series of headwinds from post-pandemic subscriber growth normalization, heightened industry competitive pressure, potential pressure on subscriber gross additions from the consumer spending environment and volatile subscriber performance as it rolled out its password sharing crackdown initiatives.”
But the Goldman expert likes what he has seen so far, writing: “In short, Netflix management has executed its password sharing initiative in excess of our prior assumptions, has regained content creation momentum in a manner that has muted any post-pandemic growth headwinds and overall industry competition has become more muted (especially from traditional media companies) in the past six months.”
Sheridan concluded that his upgrade was needed “to reflect the overall positive current operating performance for Netflix and continued forward positive operating momentum into 2024/2025.”
The Goldman analyst forecast the streamer ending the second quarter with 236.0 million subscribers, up from the 232.5 million recorded as of the end of its first quarter. Overall, Netflix’s global subscribers total was 232.5 million at the end of its first quarter of 2023.
The most recent bullish Netflix analyst report came out on Friday. In it, Wedbush Securities analyst Michael Pachter, who has an “outperform” rating and $485 stock price target on Netflix, cited positive takeaways from a survey that his team commissioned that he said should support his bullish thesis. “Netflix remains on Wedbush’s Best Ideas list, given our view that the company can generate significantly more free cash flow than its guidance suggests,” he explained. “We think Netflix has reached the right formula with its global content to balance costs and generate increasing profitability. At the same time, its ad-supported tier and password sharing crackdown should further boost cash generation.”
Speaking of those initiatives, Wedbush commissioned a streaming-focused survey by Momentive in July to track trends in the second and going into the third quarter. Among the takeaways were “improved awareness and uptake of Netflix’s advertising subscription tier” and “a positive overall reception to Netflix’s password-sharing crackdown,” Pachter highlighted. His conclusion: “As such, we think Netflix’s second-quarter earnings results will meet or exceed Street expectations, and we expect shares to rise.”
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