Netflix’s stock has recovered from a sharp 2022 drop with a rally early this year. Actually, it is up even since its most recent earnings report in October. This renewed Wall Street optimism will be put to a test Jan. 19, when the streaming giant reports its fourth-quarter results after the market close.
Analysts and investors will have all eyes on the Reed Hastings and Ted Sarandos-run company’s subscriber momentum in the final period of last year, as well as possible color on the early performance of its new cheaper, advertising-supported service tier, which, reports have suggested, hasn’t been all smooth sailing. In addition, many will have their ears out for any updates on a crackdown on password sharing that the firm is expected to start rolling out.
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Meanwhile, one of the starring roles in Netflix management’s discussion of its content strategy and successes is expected to be reserved for Tim Burton’s new original series Wednesday, which earned a quick renewal.
While the streamer is increasingly focusing on revenue as a key performance metric, unveiling in October that it would no longer provide quarterly subscriber guidance, the Street is for now keeping a close eye on subscriber trends. Netflix added 2.4 million users in the third quarter to hit 223 million overall, turning around customer declines in the two previous quarters. In its final user forecast, Netflix also projected it would add 4.5 million subscribers during the fourth quarter.
Many on Wall Street predict the company will hit or slightly exceed that 4.5 million mark. For example, J.P. Morgan analyst Doug Anmuth, who has an “overweight” rating and $330 price target on the stock, previewed the latest quarterly update in a report titled “Ad Tier in Focus, but Core Trends More Important as Metrics Improved on Strong Content.”
“Year-over-year download data improved through the course of the fourth quarter as comps eased from early in the quarter related to Squid Game, Basic With Ads likely provided some early November bump, and fourth-quarter content was strong into favorable seasonality,” he wrote, adding: “We believe the fourth quarter was a strong content quarter, with five releases among Netflix’s most watched titles ever — Glass Onion, Troll, All Quiet on the Western Front, My Name Is Vendetta and a breakout hit in Wednesday. These five hit releases follow up on Netflix adding six of its most popular pieces of content ever during the third quarter, and we continue to believe Netflix’s content cadence has become more normalized post-pandemic.”
Overall, Anmuth forecasts 4.75 million sub gains, which is above the 4.5 million management guidance and, he added, “essentially in the middle of investor expectations that we believe are 4.5 million-5.0 million based on recent discussions.”
Looking ahead, the analyst is also optimistic. “We remain bullish on Netflix shares … and the company’s ability to reaccelerate revenue, expand operating margins and grow free cash flow in 2023,” the J.P. Morgan expert wrote. But he also noted that “there is considerable focus on the recent Basic with Ads (BWA) tier launch as it expands Netflix’s reach to more price-sensitive consumers, but it is still very early (two months in) and its impact will take time. Netflix has done limited promotion or marketing around the ad tier, and we believe overall consumer awareness is low.”
As a result, Anmuth projects “only 250,000 net adds in the fourth quarter to BWA, or only 5 percent of our total 4.75 million net adds for the quarter.” His total BWA sub forecast as of the end of 2022 is higher, however, at 1.27 million, “as we project around 1 million subs trading down to BWA, which could be high.”
Cowen analyst John Blackledge is also among the bullish experts with his “outperform” rating and $405 stock price target. He projects 4.73 million subscriber net additions in the latest period, ahead of the company forecast. “Meanwhile, our annual ad buyer survey suggests a large ad opportunity over time for Netflix, while our consumer survey shows Netflix was the top choice for living room viewing in the fourth quarter,” he highlighted in his quarterly earnings preview. “We believe the new lower-cost ad tier could drive accelerating ’23 net member adds; the company’s upcoming paid sharing solution could also comprise another monetization lever. As such, we view Netflix as the best recession play in our coverage universe if macro conditions worsen, particularly as the ad tier is attractive for value-conscious consumers.”
Blackledge forecast that the streamer would end 2023 with 8 million global ad-tier subscribers, with that base rising to around 43 million by 2028.
The longer-term potential of the ad tier launch and crackdown on password sharing has also been a key focus of many other recent Wall Street reports, and management commentary about them will get much attention on earnings day.
Evercore ISI’s Mark Mahaney, who has an “outperform” rating and $340 price target on Netflix’s shares, recently called the company his top pick among large internet stocks. “We believe Netflix’s ad-supported and password-sharing revenue opportunities constitute growth curve initiatives — catalysts that can drive a material reacceleration in revenue and profit growth. Specifically, on the ad-supported offering, we believe this effectively addresses what we have tracked as rising price sensitivity among Netflix subs, and we also believe it can be done with accretive unit economics. While our $340 price target suggests very modest upside, our ‘$20 by ’25’ scenario analysis suggests a $500-plus share price level in ’24, for 70 percent upside.”
Mahaney estimated that Netflix added 4.5 million subs, in line with its own forecasts, in the final quarter of 2022. “This fourth quarter saw relatively even content slate performance, with Dahmer flow-through in October, Wednesday breakout in November, and Emily in Paris in December,” he wrote in his preview report. “Our survey also shows bullish signals in penetration for both U.S. and France and Germany. That said, HBO’s House of the Dragon (part two released in October) could have posed some competitive risk.”
Jefferies analyst Andrew Uerkwitz also addressed the impact of new initiatives when he upgraded Netflix from “hold” to “buy” on Jan. 12 and boosted his stock price target from $310 to $385. “AVOD will be slow to kick in, but when it does (paired with password sharing changes), it should drive top line outperformance,” he wrote, also forecasting a “bigger kicker” in the form of “2024 operating margin upside surprises on flattish content amortization and better revenue growth.” All this should ensure “renewed investor confidence in the business and management,” he concluded.
Other analysts remain more cautious for now. Macquarie’s Tim Nollen, who has a “neutral” rating and $285 stock price target on Netflix, in mid-December discussed a Digiday report about the streamer’s new ad tier, which hit the stock, summarizing that its rollout “isn’t going so smoothly” because the company is missing viewership guarantees and therefore returning cash to advertisers. “We don’t believe this should come as a surprise, as ad impressions delivered depend on the number of people viewing them, and Netflix with ads only got off the ground six weeks ago,” the expert said. “We believe the service will succeed by drawing users from higher ad-free tiers to this lower-price tier rather than adding new subscribers, but it could take a couple of years to build a large enough user base to become a meaningful destination for advertisers.”
Goldman Sachs analyst Eric Sheridan even has a “sell” rating, and $225 price target, on Netflix shares. In a Jan. 10 earnings preview report, he mentioned likely positive user trends. “We expect Netflix to report an inline (possibly slight upside) subscriber performance,” he noted. But Sheridan also mentioned that “it will be tough to discern how the ad-supported tier is performing within Netflix’s upcoming earnings results as it is unlikely we will receive separate disclosure around the new offering.”
In addition, Sheridan highlighted some concerns about the ad tier. “We expect a host of large-scale brand advertisers will adopt the offering but its current framework (large minimum commitment, above industry pricing and limited measurement) could cap the advertising dollar opportunity (absent a wider scale of users, greater measurement/attribution),” the Goldman expert explained. “In addition, we remain concerned that additional subscriber offerings could cause ‘spin down’ into the lowest-priced plans by users in any potential consumer recession over the next 6-12 months.”
Benchmark analyst Matthew Harrigan also remains a Netflix bear with a “sell” rating and $225 stock price target. In his Jan. 12 earnings preview, titled “Wednesday a Hit, Netflix Stock Likely Overly So in Early January,” he highlighted: “We remain cautious on Netflix despite the stock’s 10 percent early January advance, which we attribute largely to market rotation to (perceived) growth names. Netflix appears subject to the same difficult streaming market conditions as its media peers, even as its operating margins benefit from its business maturity relative to newer entrants.”
Some on the Street have recently noted that a weaker dollar in relation to other currencies will boost Netflix’s international financials, but Harrigan isn’t seeing that as a key driver. “We do not view dollar weakness as an adequate catalyst,” he noted, adding, “Benchmark’s digital media team feels the advertising [tier] launch was rushed with unrealistic above peer pricing, initially reported demanding in the $65 vicinity, and certainly limited testing, not to mention a limited immediate AVOD user base.”
Meanwhile, Netflix’s content strategy gets mixed reviews from Harrigan. “An admitted positive is the emergence of Addams Family spinoff Wednesday as a breakout pop culture hit,” he wrote. “Glass Onion and … All Quiet on the Western Front are also working.”
But the Benchmark analyst also noted that “Netflix remains quick to cancel shows that strongly resonate with some viewers but fail to meet overall performance parameters (especially completion rate), including 1899, Girlboss and Resident Evil. This is eliciting sentiment that Netflix does not allow sufficient time to build viewership after over-commissioning too many projects off a remarkable $17 billion estimated 2023 originals budget.”
