Netflix Earnings Preview: Wall Street Crowns Its Streaming King, For Now
Global streaming giant Netflix is gearing up to report its fourth-quarter and full-year 2023 earnings after the market close on Tuesday (Jan. 23), and its progress in building its advertising tier to scale and growth following a third-quarter gain of 9 million subscribers are among the topics in Wall Street’s focus.
Among the streamer’s big content launches of the final quarter of 2023 were the likes of Squid Game: The Challenge, new seasons of Lupin and Sex Education, the Money Heist spin-off Berlin, the conclusion of The Crown, awards season contenders, such as Bradley Cooper’s Maestro and Todd Haynes’ May December, Aardman Animation’s Chicken Run: Dawn of the Nugget and Zack Snyder’s Rebel Moon – Part One: A Child of Fire.
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Some experts have raised their stock price targets heading into the earnings report amid positive investor sentiment, some forecasts that it will exceed the Wall Street average subscriber growth forecast of 8.8 million and some experts’ conclusion that Netflix has already won the so-called “streaming wars” and emerged as the clear “king” of the streaming world.
On the other hand, experts expect subscriber growth momentum to slow in the first quarter, Amazon is competing for the streaming advertising pie, and investors are looking for more color on the company’s gaming business strategy.
With that backdrop, Wall Street experts have shared their predictions for Netflix’s fourth-quarter earnings update. Here is a look at key analyst forecasts and commentary.
TD Cowen analyst John Blackledge, in a Jan. 9 report, boosted his Netflix stock price target by $65 to $565, based on his long-term forecasts, and stuck to his “outperform” rating. Investors will be “focused on net adds, ad tier and paid sharing” updates in the earnings report and management interview, he argued.
“We expect paid net adds of 9.03 million reflecting seasonality and a strong slate of fourth-quarter originals (management expects net adds to be similar to the third quarter),” Blackledge wrote. “Our latest annual ad buyer survey suggests a burgeoning ad opportunity for Netflix, while our consumer survey shows Netflix remains the top choice for living room viewing in the fourth quarter of 2023.”
The TD Cowen expert highlighted moves that should boost the ad tier. “Netflix in the fourth quarter also phased out their basic plan in six additional countries, which should help further drive adoption of the ad tier,” he explained.
Blackledge also cited results from a recent survey as positive for Netflix’s ad future. “We asked 50 ad buyers whether their largest client expects to advertise on Netflix in 2024,” he summarized. “On a spend-weighted basis, 50 percent expect to advertise on Netflix in 2024, while another 21 percent are unsure.” His takeaway: “We view the potential ad buyer adoption as positive for Netflix’s burgeoning ad tier.”
On Wednesday, Bank of America analyst Jessica Reif Ehrlich reiterated her “buy” rating, while raising her price target by $60 to $585 in a report entitled “Crowning the king in streaming.”
She outlined her take on the state of streaming this way: “It is becoming increasingly clear that Netflix has won the ‘streaming wars.’ Over the last 18 months, changing market dynamics, investor focus on profitability, and the various talent strikes have led several media companies to re-evaluate their streaming aspirations.”
Sector trends, including “reducing content spend/output, increasing third-party licensing,” have been “a tacit acknowledgment that not all media companies will be able to achieve Netflix’s global reach and scale in streaming,” Reif Ehrlich highlighted. “Overall, we believe that this is a win-win for the industry and Netflix. For Netflix, the availability to purchase third-party content will likely drive additional efficiencies with its content spend going forward as the company no longer needs to finance as much higher-risk new production and can supplement more concentrated ‘bets’ with well-known established content.” As evidence, she pointed to the fact that “the recent top 10 list from Netflix has been dominated by third-party content, underscoring the high hit rate that this content has on its platform.”
Reif Ehrlich is also optimistic on Netflix’s ad upside. “At the $6.99 price point, the ad-supported tier provides an attractive low-priced option for ‘borrowers’ who still wish to access the Netflix service,” she explained. “In our view, the broader crackdown on password sharing will be an accelerant to Netflix’s ad-supported tier.”
The Bank of America analyst said she remains “bullish on the longer-term opportunity” in AVOD for the streaming giant as “Netflix’s pricing strategy should drive scale and new bundling agreements (e.g., Netflix/Max) lower the retail price for consumers and decrease marketing spend and churn for Netflix.”
Meanwhile, Wells Fargo analyst Steven Cahall on Wednesday boosted his fourth-quarter subscriber growth forecast from 9.5 million to 10.4 million, based on the estimated impact of the company’s password-sharing crackdown and broader user trends. “We’re comfortable that net adds will top sellside’s consensus of around 9 million and buyside’s bogey of around 10 million,” he emphasized.
But the password-sharing crackdown’s benefit will slow down from here, the expert predicted. “We assume that paid sharing will be a diminishing benefit for the first half of ’24 as Netflix works into the later cohorts,” he explained. “We forecast +4.2 million for the first quarter ’24 versus +1.8 million in the first quarter of ’23. We assume that second quarter to fourth quarter ’24 net adds will be below ’23 levels as the paid sharing benefit dwindles.”
Given that the password-sharing crackdown’s impact seems quite clear by now, Cahall sees investor debates about Netflix’s growth and stock outlook “more muted” until the back half of 2024. The streamer’s ad push and its cost and benefit will likely be among the key topics for Wall Street, he predicted.
The analyst estimated that Netflix ended 2023 with 13 million ad-tier subscribers. “For U.S./Canada AVOD, 2 hours per day viewing x eight ad spots per hour x $30 cost per thousand x 30 days per month = $14 per month ad average revenue per user x about 2 users per account = $29 per month potential U.S./Canada account ad average revenue per user (ARPU),” he shared his math. “However, it’s running closer to $9 per month, reflecting (Microsoft ad unit) Xandr’s cut, frequency caps and lower sell-out due to limited reach.”
Cahall’s conclusion: “We think Netflix’s number 1 initiative for 2024 will be investing to grow ads longer-term.” He has an “overweight” rating and $460 price target on Netflix shares.
Evercore ISI analyst Mark Mahaney, who has an “outperform” rating with a $500 stock price target on Netflix, in a Jan. 11 report argued that signs of an acceleration in ad tier momentum “shows promise of scale.”
Netflix earlier in the month disclosed that it has reached 23 million global monthly average users (MAUs) for its ad-supported plan. “This suggests 8 million MAU adds quarter-over-quarter, accelerating from the 5 million per quarter growth cadence in the prior three quarters,” the expert noted. “Equally important is the consistent engagement levels that these AVOD subscribers demonstrate, with 85 percent of them streaming over 2 hours per day – which we believe is in line with the engagement level of the ad-free users.”
What will the ad tier users mean for Netflix’s fourth-quarter subscriber growth? Mahaney estimated that 23 million ad tier MAUs “equate to approximately 12-15 million subscriptions, or approximately 4-5 million gross adds contribution to the fourth quarter.” This suggests that the ad tier has reached roughly 5 percent of Netflix’s global subscriber base, he continued. “Not a significant number yet, but if this growth cadence continues, Netflix may well reach 50 million MAUs and close to 10 percent of its subs base by the end of 2024.”
Mahaney’s conclusion if that materializes: “Now we’re talking real scale which could catalyze more significant and permanent ad budget shift to Netflix. We believe AVOD brings Netflix incremental gross
adds and serves as a total addressable market expander and indirect pricing power booster.” And the Evercore ISI expected emphasized: “We believe that amidst the market’s laser focus on Netflix paid sharing benefits, this AVOD incrementality has been underappreciated by investors.”
On Monday, Mahaney noted that he forecasts global subscriber net additions of 8.2 million for the fourth quarter, compared with a Street-wide average estimate of 8.8 million. But he added that “we see modestly greater upside versus downside variance for the Street’s first-quarter net adds (4.3 million) given historical seasonality of relatively even fourth- and first-quarter net adds and our survey suggesting further paid sharing upside and potentially sustaining tailwind of AVOD upside.”
Meanwhile, MoffettNathanson analyst Michael Nathanson and his team boosted their fourth-quarter Netflix subscriber forecast, based on “the success of its password-sharing crackdown and its ad tier,” by 2 million to 10 million on Monday. “As a result of our improved estimates and a higher market multiple, we raise our Netflix price target by $50 to $440,” while sticking to a “neutral” rating, the expert wrote.
“This stronger-than-expected growth for the quarter is backed by fresh data from our friends at HarrisX bearing the surprising finding that, despite strike-impacted weak content slates, streaming increased its penetration of U.S. households after several quarters of either shrinkage or stalled growth,” Nathanson highlighted. “Though this could also perhaps be due to the fact that the strikes hit linear (TV)’s fall slate even worse. It seems Netflix’s growth has been relatively unperturbed by the strikes, though data from Nielsen indicates this may be due to the generosity (or desperation) of its competitors
Guggenheim analyst Michael Morris, who has a “buy” rating on Netflix and a stock price target that he had raised by $40 to $500 in early December, estimated slightly lower ad tier user gains in the fourth quarter than other analysts. He projects ad users to hit 7.7 million (for a 2.35 million net gain) as of the end of 2023, “versus consensus of 9.5 million (3.1 million net adds).”
He described Netflix’s engagement report for the first half of 2023 in a bullish way though. “Netflix is sharing detail on a significant leadership position relative to streaming competitors,” Morris argued. “We would expect it to be unlikely that any other streamer is seeing similarly large viewership levels and therefore will not share data en masse anytime soon.”
The Guggenheim expert, however, summarized Netflix’s challenge for the new year in the headline of his report: “With confidence high, how does Netflix delight investors in 2024?”
“We feel that the analyst and investor narrative has seen a 180-degree turn from the cautious interpretation of CFO comments in mid-September to crowning the company as an unassailable media winner into fourth-quarter earnings,” he concluded. “We share confidence in the Netflix model (content sourcing and distribution leader) and execution but also believe incremental progress on key initiatives (password sharing, advertising monetization) is key to further share appreciation. We also increasingly believe that a more robust sports media strategy that leverages reach leadership in conjunction with
high-profile, live content is an opportunity that the company should be seizing to fuel more growth.”
In contrast, Benchmark analyst Matthew Harrigan remains one of the biggest Netflix bears on Wall Street with a “sell” rating, even though he increased his stock price target by $75 to $425 on Friday, noting that this was “almost entirely off (generously) conceding to our market-linked valuation relative to the Nasdaq 100 rather than the S&P 500.”
“We are not perma-bears,” he wrote, but emphasized in his report’s headline: “Remain Cautious Despite Netflix Stock Price Breakout.”
Explained Harrigan: “We still feel Netflix’s long-term business characteristics are more akin to other large media companies as streaming for all entrants continues to cannibalize linear viewing, especially as advertising gains prominence, rather than the higher growth Nasdaq 100 technology companies. This currently contravenes market consensus.”
The analyst summarized his fourth-quarter expectations this way: “We do believe there could be upside to our 8.8 million member growth assumption to marginally above 10 million.”
Harrigan will look out for possible latest commentary from Netflix management on content strategy. “Netflix is showing improved cost discipline,” the Benchmark expert noted. “Netflix is now prioritizing quality rather than volume on a global basis, although it retains particular advantages in its foreign programming. It reduced the number of 2023 films and TV shows by around 130, a 16 percent decline after increasing output every year over the last decade, with particular acceleration in the second half of 2023 off the SAG and WGA strikes. It is also apparent Netflix is now more amenable to selectively licensing content, especially classic movies.”
Meanwhile, Michael Pachter, analyst at Wedbush Securities, a former Netflix bear, continues to see upside for the streamer. He has an “outperform” rating and $525 price target on the stock.
“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 wrote in December. “We think Netflix has reached the right formula with global content creation, balancing costs and increasing profitability, while its password-sharing crackdown and eventually its ad-supported tier should further boost cash generation.”
Pachter summarized his take on Netflix’s recent push on those two fronts this way: “The primary takeaway from Netflix’s third-quarter earnings was that the password-sharing crackdown continued to drive new standalone subscribers who previously piggy-backed on others’ accounts, while the crackdown also added meaningfully to ARPU through Netflix’s ‘extra member’ option (where piggy-backers can remain on an account for an additional monthly fee). We think that the ad tier, while still dilutive to ARPU, is limiting typical churn and elevating overall subscriber numbers by offering prospective churners a lower cost option to remain subscribers.”
In terms of the streamer’s ad business outlook, the Wedbush analyst predicted: “As Netflix continues to add ad-tier subscribers, and as it increases its ad delivery rates, its ad-tier will also drive ARPU higher while continuing the limit churn.”
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