Netflix Shares Fall After Big Q2 Subscriber Beat, as Investors Hoped for Bigger Bang From Password-Sharing Crackdown
Shares of Netflix were down more than 8% in early trading Thursday, coming after the streamer blew away estimates for subscriber gains for the second quarter — and analysts said the company continues to be well positioned relative to its peers to weather Hollywood’s double actors and writers strike. But investors had been anticipating a bigger bump from Netflix’s new initiative to monetize password-sharing accounts.
Note that Netflix’s post-earnings stock drop came amid high investor expectations leading into the Q2 report: Shares were up nearly 62% year to date in 2023 through close of trading July 19.
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Revenue for Q2 came in at $8.19 billion, shy of Wall Street’s $8.3 billion consensus expectations. And Netflix’s guidance for Q3 revenue of $8.52 billion also was less than the $8.9 billion average forecast by analysts. The company added 5.9 million net new subs in the second quarter, more than double expectations, and said it expects to add about the same number in Q3.
The company told investors that its move to push password-piggybackers to sign up for their own accounts or be added as an “extra member” was having the intended effect of boosting overall subscriber numbers. Regarding the paid-sharing launch, which Netflix broadly rolled out in 100-plus countries starting in mid-May, “we’re seeing that it’s working,” co-CEO Greg Peters said on the earnings interview. “We’re positive in terms of both revenue and subscribers relative to pre-launch in all of our regions. But I also think it’s important to note that the business impacts of that product experience will roll in over several quarters.”
However, Netflix didn’t share details on the paid-sharing program, nor did it provide new data on its ad-supported tier except to say revenue is still not material.
“Without company disclosure around the number of ‘Extra Members’ being added to accounts as part of the password-sharing crackdown, the number of users that crackdown has even targeted so far or any insight into the number of subscribers on the Standard with Ads tier, the drivers underpinning Netflix’s revenue growth are more unclear than ever, giving us less confidence in our ability to accurately model this company,” MoffettNathanson principal analyst Michael Nathanson wrote in a note. The firm has a “market perform” rating on Netflix with a target price of $380/share (well below its July 19 closing price of $477.59).
Most of Netflix’s revenue growth for 2023 will be from new paid memberships — after the company has paused price hikes in major markets for at least a year — largely driven by the paid-sharing rollout, CFO Spence Neumann told analysts on the earnings interview: “It is our primary revenue accelerator in the year.”
Right now, Netflix is on track to reach nearly 25 million net adds from the paid-sharing program in 2023, Morgan Stanley analyst Ben Swinburne estimated, adding that would be just under his prior 25 million-30 million projection. “Netflix’s goal for the past 18 months has been to re-accelerate revenue growth into the double digits — it appears on track to get there in 4Q,” the analyst wrote in a research note, although he revised the fourth-quarter revenue growth estimate for Netflix from +12% to +10%.
Despite the stock pullback, analysts generally remain bullish on Netflix’s status as the leader in the streaming market.
“Overall, Netflix remains well positioned to remain a secular streaming winner, in our view,” William Blair analyst Ralph Schackart wrote in a research note after the Q2 earnings report. “We believe 2023 stock upside will likely be driven by a combination of potential multiple expansion and revenue growth as the company accelerates growth, expands margin and increases free cash flow throughout 2023.” The firm maintains an “outperform” rating on Netflix stock.
Particularly bullish after Netflix’s Q2 earnings report was Pivotal Research Group analyst Jeff Wlodarczak, who raised his price target on the stock to a Wall Street-high $600/share (from an already high target of $535) with a “buy” rating. The analyst raised 2023 global net new subscriber addition forecast from +15 million to +21 million; Wlodarczak slightly reduced his revenue estimate for this year (from $34.3 billion to $33.8 billion) but said “we feel confident in Netflix’s ability to raise [average revenue per subscriber] materially” over the long term.
Wlodarczak saw it as a positive sign that Netflix on Wednesday eliminated the lowest-cost option with ads (the Basic plan, $9.99/month in the U.S.) for new members in the United States and the U.K. in a bid to drive up subscriptions to the ad-supported service (as well as to the Standard $15.49/month plan without ads).
“We remind investors that Netflix remains a very affordable, arguably underpriced, entertainment product and management has demonstrated continually an ability to successfully take price (enhanced by their recent decision to eliminate the basic ad free tier for new/returning subscribers),” Wlodarczak wrote in the note. “The most important takeaway from these results is without question the password-sharing monetization effort has gotten off to a smashing start with what appears to be a significant runway for growth in regards to subscribers and ARPU growth.”
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