Netflix’s Stock Is Rising on the Promise of Ads and a Crackdown on Password Sharing
Wall Street is betting on a big comeback for Netflix after a no good, terrible start to 2022 where the streaming giant hemorrhaged subscribers amid fierce competition from the likes of Disney, Paramount and Warner Bros. Discovery.
Netflix posts third-quarter results after the stock market closes Tuesday, and co-chief executives Reed Hastings and Ted Sarandos will lead a call with Wall Street analysts to map out their strategy. They are charging full-speed ahead to launch an advertising-supported version of the platform in November, and on Monday unveiled the first step to cash in on the massive number of subscribers who share passwords.
Netflix’s ability to launch an ad-based service so quickly has caught the attention of investors, who have been concerned Disney would dominate the streaming market with its own upcoming ad-supported tier. Shares of Netflix have jumped 16% since it unveiled its ad tier plans last Thursday, and moved higher in pre-market trading on Tuesday. (The stock is still down nearly 60% from the start of the year.)
Remember, Hastings almost casually admitted six months ago that he might be willing to introduce an ad tier as something he’s “trying to figure out over the next year or two.” Management had to act more quickly once Netflix stock that once traded near $700 a share cratered to under $200 in a year’s time after some 1 million subscribers defected from the service this year.
“Given investors’ focus on the upcoming ad tier and paid sharing efforts, these new offerings could partially offset any weakness in reported third-quarter,” Cowen & Co. analyst John Blackledge said. “They are increasingly focusing on the opportunity ahead as Netflix rolls out ad tier and password-sharing efforts, while also working through pandemic pull-forward in demand.”
The company is projected to report that earnings per share fell by more than a third year-over-year to $2.12 a share, according to the average analyst consensus. Revenue is forecast to edge up about 5% to $7.8 billion. If Netflix meets these already lowered expectations, it will mark the streamer’s second earnings decline in the past three quarters and its slowest revenue growth in more than six years.
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But actually hitting financial targets has had very little to do with how Wall Street interprets Hollywood studios who have bet the farm on their streaming ambitions. A win in the eyes of investors used to be beating EPS and revenue estimates. Then it became all about the number of subscribers that Netflix and rivals added during a quarter.
Now, it’s all about the ads, the ads. No subscribers.
Netflix unveiled last week its “Basic With Ads” service will launch Nov. 3 at $6.99 a month in the U.S., a similar price point that’s being rolled out in Australia, Brazil, Canada, France, Germany, Italy, Japan, Korea, Mexico, Spain and the U.K.
Current members and those with current plans won’t be impacted lest they decide to switch to the tier. The ad-tier will complement the streamer’s ad-free basic, standard and premium plans, which are priced at $9.99, $15.99 and $19.99, respectively. There will be an average of four to five minutes of ads per hour with each lasting 15 or 40 seconds in length.
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Analysts have long been pontificating about who will be the “Netflix Killer,” especially as Paramount+ ramps up with big hits like “Top Gun: Maverick” about to land on streaming in the weeks ahead and Warner Bros. Discovery CEO David Zaslav prepares to merge Discovery+’s reality programing with HBO Max.
But as Netflix misfortunes have grown since January, everyone from hedge funds to mom-and-pop investors have wondered who can compete with Disney+. The streamer is launching its own ad tier at $7.99 per month in December, but subscribers who don’t have the patience for ads can pay $3 more a month without advertising.
The big threat from CEO Bob Chapek’s studio is that management already knows the ins and outs of the advertising business from three major enterprises. ESPN+ and Hulu all offer streaming patrons an option for ad tiers, and the media behemoth is savvy about advertising by running broadcast networks like ABC and multiple cable channels.
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“Advertising is critical to re-accelerating revenue and driving greater profitability,” JPMorgan Chase analyst Doug Anmuth said. “The Netflix narrative has shifted from slow or no subscription growth on the current business to advertising and paid sharing.”
That’s the other big issue Hastings and Sarandos are expected to address to analysts: the freeloaders. The company has estimated that passwords are being shared in violation of its rules with more than 100 million non-paying households worldwide, and about a third of those come from North America alone.
Netflix unveiled on Monday the launch of Profile Transfer, a feature that gives anyone on an existing subscription the ability to move their profile to a brand-new account while preserving all of their personalized recommendations, viewing history and other settings. And, with a $6.99 ad-tier, this could deal those users a get-out-of-jail-free card.
If every one of those 100 million non-payers decided to plunk down an ad-tier subscription, it would generate annual revenue of nearly $700 million. That may be pie in the sky, but Netflix upper management needs to achieve some of that to maintain their title as the biggest streaming service on the planet.
“People move. Families grow. Relationships end. But throughout these life changes, your Netflix experience should stay the same,” Timi Kosztin, the company’s product manager of product innovation, wrote. “No matter what’s going on, let your Netflix profile be a constant in a life full of changes so you can sit back, relax and continue watching right from where you left off.”
That’s right, Netflix is your friend for life. Chill.
