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The first few months of 2022 have not been kind to Netflix shares, which have dropped 44 percent year-to-date. As of the most recent week’s close, they stood at $341.13, down from $612.09 at the end of 2021. And few on Wall Street expect the streaming giant’s first-quarter subscriber and earnings report on Tuesday to turn around the currently gloomy mood of investors.
“Heading into earnings on April 19, Netflix is a frequent topic in our discussions with investors, shares remain controversial and sentiment skews negative,” J.P. Morgan analyst Doug Anmuth summarized the state of play in an April 7 report.
After all, weaker-than-forecast fourth-quarter subscriber gains amid what management called “added competition” and disappointing first-quarter user growth guidance of net adds of 2.5 million, down from 4 million in the same period of 2021, caused a big hit from which the stock hasn’t recovered. Then the streamer’s latest subscription price hike was widely taken as underlining the company’s need to look for revenue upside from sources other than user additions.
Analysts have also highlighted that Wall Street has ramped up focus on increasing spending on original content amid intense competition in the streaming space. Against this backdrop, Netflix seems to need to pull a rabbit out of its hat as part of its latest earnings report to change the mood in a big way. More likely, though, is that management will continue to emphasize the theme of streaming growth that it also highlighted in its fourth-quarter investor letter, where it said that “the greatest opportunity in entertainment is the transition from linear to streaming and that with under 10 percent of total TV screen time in the U.S., our biggest market, Netflix has tremendous room for growth if we can continue to improve our service.”
As far as first-quarter subscriber momentum goes, Netflix’s decision to suspend its service in Russia — where J.P. Morgan’s Anmuth estimates the firm had 1 million to 2 million users — due to the country’s invasion of Ukraine will be an additional headwind. Based on discussions with investors, Anmuth said, “we believe expectations for first-quarter net adds are 3.0 million-plus before Russia (compared to our 2.7 million estimate), or around 1.0 million-2.0 million-plus, post-Russia.”
Cowen’s John Blackledge, who has an “overweight” rating and $605 stock price target on Netflix, shared in the headline of his April 12 report that he was “slightly trimming first-quarter sub net adds given Ukraine conflict.” In the report itself, he noted: “We now expect paid net adds of 1.45 million, below guide of 2.5 million given Russia suspension (around 1 million subs).”
About U.S. trends, Blackledge wrote: “Our U.S. survey suggests Netflix still holds a wide lead in living room TV, even as TikTok gains mobile video viewing share.” But he also noted that a U.S. price increase early in the year “could slightly increase near-term churn.” Overall, the Cowen expert “slightly reduced our sub forecast,” as a result of which he cut his stock price target by $10 to $590. He kept his rating at “outperform,” though.
BMO Capital Markets analyst Daniel Salmon also updated his user forecast for the suspension of services in Russia and “solid download data in Southeast Asia and India.” Overall, his net additions projection falls to 1.76 million from 2.48 million, “reflecting an estimated 1 million fewer Russian members … partially offset by higher Asia-Pacific net additions.” He added: “Our target declines to $640 from $650 driven by lower estimates, largely owing to the removal of Russia from our model.”
But Salmon maintained his “outperform” rating on the stock, summarizing: “Subscriber growth still matters, but the market is bringing far greater scrutiny of the path to profitability for more recent streaming entrants, and the trajectory of now-positive free cash flow estimates for Netflix. We remain above consensus on free cash flow, as we see continued optimization of content spending driving top-line growth, while the total rate of spending eases.”
Like his peers, Benchmark analyst Matthew Harrigan, who has a “hold” rating on Netflix, also sees little room for a positive subscriber surprise. “We do not see much upside to seasonally weaker first-quarter guidance for 2.5 million global member growth from end of quarter Bridgerton season two and earlier Inventing Anna,” he wrote in a March 30 report. “This is as management downplays effects from any given original release. Fourth-quarter 2021’s Korean language dystopia Squid Game was the breakout all-time No. 1 series in viewing hours at 1.65 billion in its first 28 days, while Red Notice was the most watched film at 364 million hours. Fourth-quarter global member growth was still unremarkable at 8.3 million despite these two releases.”
However, Wells Fargo’s Steven Cahall, who has an “overweight” rating and $600 price target on Netflix, in a Sunday note increased his first-quarter subscriber forecast. “We’re raising first-quarter net adds from 2.5 million to 2.9 million based on our monthly active users (MAU) correlation analysis and the impact of 1-2 million Russia subs being deactivated,” Cahall wrote, adding: “[T]his is a wait and see quarter with investors likely resetting afterwards rather than doing much into the print. In fact, we think many investors would like to see how first-half net add actuals come in as a stronger determinant to the Netflix thesis and valuation.”
Meanwhile, Wedbush Securities analyst Michael Pachter, who is “neutral” on the stock with a $342 price target, is expecting global user adds of 2.5 million “in line with guidance, as any upside was likely swallowed by the removal of Russian users in the quarter.” He has modeled 400,000 net adds in the U.S. and Canada, “with revenue in the region boosted by price increases that hit in the quarter; 750,000 net adds in Europe/Middle East/Africa, with price increases in the quarter likely offset by unfavorable currency headwinds; and 300,000 net adds in Latin America, with lower average revenue per user on currency headwinds.” He also projects 1.05 million subscriber additions in Asia “driven in part by lowered price in India that likely drove user growth in the quarter.”
Meanwhile, Guggenheim analyst Michael Morris forecasts a more bullish 3 million global paid net member adds in the quarter, writing in an April 11 report: “Our outlook is supported by third-party Apptopia download data … Per this data, global app downloads in the first quarter were consistent with those in the third quarter 2021, during which the company added 4.4 million global members, and the data has been directionally consistent with reported performance. We have adjusted the geographic composition of our outlook to reflect conflict-related headwinds in Europe offset by relative download strength in Latin American and Asia Pacific markets.”
Morris noted that his “relatively higher member forecast as compared to guidance also reflects our confidence in Netflix’s back-end first-quarter weighted content slate (The Adam Project, Bridgerton season two, Bad Vegan, continuation of Inventing Anna viewership), supporting incrementally stronger gross member additions and lower churn exiting the quarter.” The analyst stuck to his “buy” rating and $555 stock price target on Netflix.
Evercore ISI analysts, led by Mark Mahaney, in a March 16 report also noted some positive and some negative findings of a proprietary 1,500-respondent U.S. survey. “Sixty-nine percent of respondents used Netflix, up 2 percent quarter-over-quarter, followed by Amazon (66 percent), Hulu (54 percent), Disney (53 percent) and HBO (40 percent), and the big get bigger — all leading streamers gained shares this quarter,” they wrote. Mahaney’s overall takeaway was optimistic, though. “If content is king, Netflix wears the crown,” he wrote. The analyst maintained his “in line” rating on Netflix with a price target of $525.
Wall Street will also focus attention on any commentary about Netflix’s three-market test of making money from password sharing beyond the subscriber’s household. Many see it as a chance for the streaming giant to make money off people who don’t have their own subscription so far, but several analysts have raised doubts about whether it can have a big benefit.
“I suspect that a crackdown will result in 5 percent subscriber growth, partially or fully offset by an increase in churn, and it won’t impact financials much, if at all,” Wedbush Securities analyst Michael Pachter recently told The Hollywood Reporter. “I think they are doing this now because growth has stalled to a crawl.”
And Cowen’s Blackledge wrote in a recent report: “Our analysis suggests a global rollout could drive about 4 percent upside to our ’23 revenue estimate.”
Harrigan even said he was “skeptical that ‘add an extra member’ is a growth game-changer, especially as it likely cannibalizes full ride member growth.” In a March 17 report, he shared this math: “Reasonably, the high-margin revenue benefit might be current members sharing passwords (about 30 percent) x incremental revenue contribution (about 25 percent) x percentage of households taking the new plan (50 percent?). This equates to a sub-4 percent incremental revenue benefit before cannibalization from not converting one to two outside individuals to stand-alone members.” Harrigan’s takeaway: “This is a moderate benefit relative to most estimates for lost sharing economics.”
Meanwhile, Leichtman Research Group found that “33 percent of Netflix services are used in more than one household” in the U.S. It said 15 percent of subscriptions are “used and paid for by those that also share them with someone outside the household, 15 percent of Netflix services are used in one household but are borrowed from another household that is paying for the service” and 3 percent of are used by multiple households that share the costs.
“Sharing helps to expand the user base and retain customers, but it also creates a gap between the number of households that have a service and actual paying subscribers,” said Bruce Leichtman, president and principal analyst for Leichtman Research Group. “For example, about two-thirds of U.S. households report having Netflix, but this includes about 10 percent of U.S. households that don’t pay for the service because it is borrowed from someone else’s subscription.”
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