J.P. Morgan upbeat on Netflix despite questions on paid sharing, sub growth outlook
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Netflix (NASDAQ:NFLX) posted its second-quarter earnings just over three weeks ago, a mixed report that was light on revenue outlook but strong on subscribers and profits -- and the stock sank in response on the next open, and has slipped more than 11% since, worse than a broader-market decline of about 2%.
In a new update, J.P Morgan says it's staying positive, but has heard investors pushing back on key post-earnings debates: notably paid sharing, core growth and pricing power, and cash flows.
After some initial enthusiasm, paid account sharing monetization "is coming a bit slower than we initially expected," with only modest acceleration expected in Q3 to 7% from 6%, analyst Doug Anmuth said. Still, benefits should be more apparent in Q4 and 2024, and "we continue to believe Paid Sharing will be highly accretive to revenue over time based on: (1) solid conversion of the 100M+ global borrowers (we currently model 38M convert); & (2) [average revenue per member] accretion as borrowers pivot to becoming Extra Members or new subscribers."
The advertising tier will help more in Q4 and 2024 as well, with ad-tier monthly active users now at 10M-plus, he said, and "we believe Advertising will be a bigger and more durable revenue stream than Paid Sharing over time."
The uncertainty around Paid Sharing is leading some to get cautious about underlying subscription/revenue growth despite the Q2 outperformance there. But Anmuth thinks company outlook is conservative and raised estimates, seeing 25M net subscription adds this year and 19M in 2024. And "importantly, we believe NFLX will continue to have pricing power over time."
As for cash flow, Netflix boosted its 2023 free cash flow guidance to $5B0-plus from $3.5B-plus -- some of which is due to Hollywood strikes, but the company also indicated most of that increase would come from normal operations, including lower cash content spending.
"Extended duration of the strikes could drive [free cash flow] higher, but that would likely result in some holes in the content slate in 2024, and investors will not give the company credit for inflated free cash generation," Anmuth said.
Despite the pushback, the firm is staying bullish on Netflix, saying its advantages point to 2024-2025 average growth in the (percentage) teens for revenue, and in the 20s for operating income, GAAP earnings per share and free cash flow.
His price target of $505 is a multiple of 25 times 2025 free cash flow, and 27 times 2025 GAAP EPS -- and it currently implies 19% upside.

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