Wall Street Has Netflix Password-Sharing in Focus Ahead of Next Earnings Report
The Night Agent didn’t stay undercover for long as a big number of Netflix subscribers enjoyed tracking the streamer’s latest original hit series right away. In contrast, investors are still looking to uncover the mystery of the global streaming giant’s much-discussed password-sharing crackdown. No wonder then that management’s commentary on its somewhat slower-than-expected rollout and its business impact is set to be one of the key focus areas for Wall Street when Netflix reports its first-quarter results after the stock market close on Tuesday, April 18.
Netflix, which had ended 2022 with 230.75 million global subscribers, launched what it calls “paid sharing” plans in Canada, New Zealand, Spain and Portugal in early February after trials in Latin America last year. The goal: to make paying subscribers out of moochers using a subscriber’s password to watch for free. Primary Netflix households have therefore been able to add up to two people outside of their homes for an additional CAD$7.99 per month per person in Canada, NZD$7.99 in New Zealand, 3.99 euros in Portugal, and 5.99 euros in Spain.
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A subscriber hitch is widely expected when companies introduce such fundamental changes, but how long and significant it was or is in the affected Netflix markets remains the topic of much debate. After reports of increased Google search activity for the term “cancel Netflix” in Canada in February and investor concerns about user losses, more recent reports have suggested that these trends could have been fairly short-lived. But Wall Street is keen for updates, color and detail on the subscriber and financial impact from the Netflix team led by executive chairman Reed Hastings and co-CEOs Ted Sarandos and Greg Peters, along with an update on the success of a new and cheaper advertising-supported subscriber tier.
Macquarie analyst Tim Nollen, who has a “neutral” rating with a $350 price target on Netflix shares, alerted investors in a Friday note that the Tuesday earnings report and call “may include important updates to the ad tier progress and details on paid sharing plans to crack down on password sharing.” In his report, entitled “Time to Monetize Free Riders,” he explained: “We view the launch of paid sharing as an essential component of the ad tier launch – the former can jump-start the latter.”
J.P. Morgan analyst Doug Anmuth, who has an “overweight” rating and $390 stock price target on Netflix, in his April 11 earnings preview also argued that the move against password-sharing and the recent launch of the streamer’s advertising-supported subscriber tier “should further help re-accelerate subscriber and revenue growth while driving high-margin incremental revenue.”
What does Anmuth expect from the latest set of results? “Heading into first-quarter earnings we remain positive on Netflix shares overall, but we believe there is near-term risk to second-quarter numbers as paid sharing likely rolls out more broadly during the quarter,” he wrote. “Just as there was initial subscriber pushback and bumpiness in recently launched markets, such as Canada, we would expect similar friction across a larger set of markets, likely to include the U.S., Brazil, those in Western Europe and many others.” Accordingly, he expects Netflix to “walk back its expectation for greater paid net adds in the second than the first quarter” as the bulk of the paid sharing rollout will likely now happen during the “seasonally weak” second quarter.
Given what the analyst sees as “at least a modest shift in timing” for the rollout, he boosted his first-quarter user net user addition estimate from 1.5 million to 3.25 million, while cutting his second-quarter forecast from 3.25 million to 1.0 million. That leaves his first-half 2023 projection for net subscriber additions at 4.25 million, down from 4.75 million compared with investor expectations in the 4.0-5.0 million range. But he raised his third-quarter subscriber growth prediction by 500,000 to 4.5 million, leaving his full-year 2023 estimate at 16.0 million.
For the stock, which was up 16 percent for the year as of Thursday’s close at $346.19, much could depend on management color on paid sharing’s business impact on subscriber growth and retention. “Netflix shares responded extremely well a few weeks ago to third-party data suggesting Canada had recovered from initial pushback around the paid sharing rollout,” Anmuth pointed out. “Indeed, if the data is right, climbing the J-curve (a trend that starts with a sharp drop and is followed by a dramatic rise) within six weeks would be impressive and would instill confidence in expanding the initiative to other markets.” But he also warned that “it’s unclear that other markets, especially much bigger markets, would respond exactly the same way and in the same timeframe,” causing a lack of clarity for investors.
Wall Street is also looking for a possible update or guidance on the timing of the rollout of the password-sharing crackdown in the U.S.
“We think a U.S. announcement is imminent given how pervasive password sharing is in the region and the money Netflix is therefore leaving on the table by allowing free riders,” argued Nollen.
“Presumably, Netflix will expand this to domestic accounts once it irons out any kinks or major pushback from users,” Wedbush Securities analyst Michael Pachter suggested in a Thursday report, in which the former Netflix bear reiterated his “outperform” rating and $410 price target on the stock.
“Even while ads are not yet directly accretive, the (new) ad tier should continue to reduce churn and draw new subscribers to the service,” he argued. “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.”
What does Pachter expect from the January-March period now that the streamer doesn’t provide detailed subscriber forecasts anymore, instead focusing on revenue? “We think Netflix is poised to beat its first-quarter guidance for revenue of $8.17 billion (consensus is at $8.18 billion) and earnings per share of $2.82 (consensus is at $2.86).” His estimates assume 3.5 million global net subscriber additions, including 500,000 in North America, 1.5 million in Europe, the Middle East and Africa, 1 million in Asia, and 500,000 in Latin America.
Meanwhile, Wells Fargo analyst Steven Cahall, in a Thursday report, predicted positive commentary about the company’s password-sharing crackdown. The analyst, who has an “overweight” rating and $400 price target on the stock, estimates that Netflix added 2.5 million global subscribers in the first quarter, an increase from his previous 2.0 million forecast and “slightly above (Wall) Street’s 2.3 million.”
“We’re bullish on Netflix (heading) into first-quarter 2023 results as we think management will be optimistic on the lift to the profit and loss (statement) from paid sharing implementation,” he wrote. “This should push estimates higher and supports Netflix’s continued evolution.” He even argued that the latest earnings report “will be less about quarterly results and more about the upcoming U.S. paid sharing implementation.”
In his analysis of that, Cahall found that the upside revenue opportunity looks encouraging, given that “extra member pricing is higher than expected at around $8 per month, while recapture of cut-off sharers is also providing a benefit to gross adds/net adds.”
If Netflix management does indeed sound optimistic notes on the earnings call, the Wells Fargo expert predicts “one to two quarters” of increases in consensus estimates for 2023 and 2024 revenue, operating income and earnings per share.
Others on the Street are echoing that Netflix investors have a big appetite for updates on new business initiatives.
TD Cowen analyst John Blackledge, for example, who has an “outperform” rating and $440 stock price target on Netflix, said that in the latest earnings update, investors would “look for additional detail around Netflix’s recent monetization efforts.” After recently touting Netflix as one of his firm’s best ideas for 2023, he emphasized: “Netflix’s paid sharing coupled with burgeoning ad tier should drive long-term revenue upside,” adding: “We also expect these monetization levers, alongside easing comparisons, will help drive a re-acceleration in revenue growth in the second half of 2023.”
However, Blackledge only forecasts subscriber gains to the tune of 1.45 million in the January-March period. He noted though that TD Cowen survey data suggests that the password sharing crackdown would “drive upside” to subscriber growth and average revenue per member in the U.S. and Canada. “Our latest proprietary survey data suggests that Netflix’s paid sharing measures could add a significant number of U.S. paid sharers, as well as drive new member adds in ’23,” he wrote.
The company has said there were 30 million password-sharing homes in the U.S. and Canada. “In March ’23, about 37 percent of password sharers in our survey suggested they want to maintain access to Netflix,” Blackledge noted. While 16 percent said that, if Netflix requires users to pay $8 a month to maintain access, the subscriber would pay that monthly fee, “another 21 percent would get their own separate account, implying around 5-6 million new U.S. members, well above our current 2 million-plus U.S. net member adds in ’23.”
On the other end of the spectrum, Benchmark analyst Matthew Harrigan remains one of the big Netflix bears on Wall Street with a “sell” rating and a $250 stock price target. “Some grumbling around password sharing crackdown is hardly surprising,” he wrote in a March 21 report, adding that in Latin America “there was considerable anecdotal pushback.” No wonder then that investors are hoping for more color. “There is perceived uncertainty around how the U.S. push could impact second-quarter U.S. growth,” he highlighted.
Harrigan also wrote that he expects Netflix’s launch of an ad tier would help boost financials over time, but he remains “cautious” on the stock for now. “Advertising initiatives and the nettlesome password- sharing crackdown should be average revenue per member (ARM) accretive, but in Benchmark’s view largely position the stock to offset SVOD competitive pressure.”
Goldman Sachs‘ Eric Sheridan also has a “sell” rating on Netflix, with a stock price target of $230. “It would appear Netflix sustained elevated churn for a multi-week period after instituting the password-sharing crackdown in markets like Canada and Spain, which eventually stabilized after roughly a month,” he noted. “However, we expect a debate will remain as to how revenue accretive the outcome was.”
His expectation: “Netflix management will frame the password-sharing crackdown as a longer duration initiative in 2023 that it is likely to be better aligned in specific geographies with a more robust content slate than the one seen in March 2023.”
But the Goldman expert also highlighted a strong recent run that Netflix’s stock has been on. “Over the past six months, Netflix has continued a run of share outperformance (+59 percent versus the S&P 500 at +15 percent) on the back of investor rotation back into dislocated growth stories in tech broadly and on the back of rising investor confidence in Netflix’s ability to navigate a mixture of a more mature end market, a crackdown on global password sharing and the rollout of an ad-supported tier,” he wrote, noting potential downside of around 30 percent for the stock.
Sheridan also touched on the content outlook ahead of the streamer’s earnings report. After all, investors will look for potential commentary on Netflix’s second-quarter originals slate, which so far contains fewer launches than the first quarter, which included the likes of The Night Agent and season 4 of You. “The second quarter ‘23 appears to have a slightly less robust slate, in terms of (the) number of titles launching – based on the current title slate announced, Netflix is on track to deliver 57 original titles in the second quarter versus 125 in the first quarter,” Sheridan wrote. “However, we acknowledge Netflix tends to have a small time gap between announcement and release date.”
Finally, Morgan Stanley analyst Benjamin Swinburne remains in wait-and-see mode on Netflix amid various variables, sticking to his “equal weight” rating with a $350 stock price target. “We see a balanced view of the upside and downside potential in shares at current prices,” he wrote in an April 11 report fittingly entitled “The Diplomat.” “A slower paid sharing rollout and associated churn creates upside to first-quarter net adds, while the second quarter faces seasonality and tough content comparison headwinds.”
His reasoning: “Netflix has rolled out paid sharing in just four markets thus far this year, less than expected. … All else equal, this suggests upside to first-quarter net adds guidance/expectations.” His estimate has been for 1.5 million subscriber gains. His second-quarter user growth estimate of 1.55 million is below the Wall Street consensus of 3.8 million, he noted, blaming the facts that the second quarter has historically often been weaker for Netflix and that there are tough comparisons to year-ago originals launches, including the first part of season 4 of Stranger Things and the second part of season 4 of Ozark. “However, a continued delay in paid sharing and associated churn creates the potential for upside, while a more substantial rollout of paid sharing during the second quarter creates downside
risk,” the Morgan Stanley analyst concluded.
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