Jefferies sees potential subscriber miss at Netflix; waiting for ads to develop
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Jefferies comes out cautious following a fresh look at Netflix's (NASDAQ:NFLX) content strategy, particularly with the new ad-supported tier just starting to grow up a bit.
In particular, it's led analyst Andrew Uerkwitz to suspect that fourth-quarter subscriber growth may be merely in line with expectations, or even miss them.
The firm ran several correlations on data covering the company's top 10 most viewed content across regions, and while the scope of that look is limited, "the biggest shows in the English language show little correlation to overall engagement or sub adds, while it's more correlated in international."
That offers more confidence in management holding spending stable if it wants to, Uerkwitz said (Netflix co-CEO Ted Sarandos recently said the company's annual $17B in content spending is likely to flatten out around that number).
But it also leads Uerkwitz to think sub growth may miss based on current consumption data, driven by a miss internationally, he said.
As for the advertising tier - launched in early November - Uerkwitz says it will "largely be immaterial" until the effort is linked with crackdowns on password sharing.
"We think the two are intricately linked in terms of what drives AVOD (ad-supported video on demand) growth and expect 2Q23 as the 'start' date," he said.
"By 2024 we see conversion of the target audience being 67%, lower churn in the turn on/turn offs category, and fewer 'downgrades of higher-priced tiers,'" he said. That amounts to some $6B-$7B in revenue contributions by 2024 from the combination of ad support plus incremental subscriptions from a password crackdown, he figures.
He has a Hold rating, and putting it all together says Jefferies' estimates are below Street consensus for the fourth quarter and for the first quarter of 2023 - but by the end of 2024, with a more mature ad tier, Jefferies is 7% above the Street: "We believe we could get a better entry price on our long-term thesis."
Last week, Wells Fargo upgraded Netflix stock (NFLX) based on growing stability in the subscriber base.