Netflix earnings: Street sees volatility around password crackdown
Mario Tama/Getty Images News
Heading into next week's Netflix (NASDAQ:NFLX) earnings, all analyst eyes seem to be on the effect that a broader crackdown on sharing the service's passwords will have on subscriber growth in the second quarter (and beyond).
Bearish Benchmark is maintaining a Sell rating and staying cautious as advertising initiatives and the "nettlesome" password sharing crackdown -- despite likely boosting average revenue per member -- "may largely work to offset some [subscription video on demand] competitive pressure rather than reignite growth under current difficult conditions," analyst Matthew Harrigan said.
There's some perceived uncertainty around how the account-sharing push could affect Q2 growth in the U.S. (and especially hitting management's expectations for sequential growth), he noted. He's maintaining a $250 price target, currently implying 26% downside.
J.P. Morgan agrees that with a bigger rollout of paid sharing coming in Q2, the company may need to walk back its ambitions for sub growth. After some initial pushback in recently launched markets like Canada, "expect similar friction across a larger set of markets, likely to include the U.S., Brazil, those in Western Europe, and many others," analyst Doug Anmuth said.
The pacing of the rollout has led him to rearrange his own expectations: He's boosting expected first-quarter net subscriber adds to 3.25M from 1.5M, and cutting second-quarter net adds to 1M from 3.25M. But he's keeping an Overweight rating and a $390 price target.
Citi is also bullish, saying there's volatility ahead but: "We would encourage investors to not overreact" on first-quarter metrics or financials and to "keep their eye on the prize," analyst Jason Bazinet said. The first quarter will be confusing around the ad tier, slower password-sharing crackdown, and questions around "sharply lower" prices in lower penetration markets.
But "We continue to believe two things: (1) the crackdown on password sharing wonât result in incremental revenue (as lower [average revenues per user] are offset by better net adds), and (2) the ad tier will add ~65M subs with ARPUs above [standard subscription] levels," he said. Citi has a $400 price target, implying 19% upside.
In its update, Morgan Stanley is sticking firmly to the middle of the fence -- reiterating an Equal Weight rating and saying "we see a balanced view of the upside and downside potential in shares at current prices."
Netflix (NFLX) is "the streaming winner, but priced as such," analyst Benjamin Swinburne said. "Paid sharing and ad-tier opportunities are significant but appear largely captured in expectations and valuation," he added.
A relatively slow rollout of the streamer's paid sharing initiative -- it's only live in four countries so far -- will actually create a favorable year-over-year comparison in churn, he noted, considering the broad rate increases of the first quarter of 2022. And that points to upside to current first-quarter expectations for net subscriber additions (which he estimates at 1.5M).
Meanwhile, a broader rollout of paid sharing could pressure Q2, and the company is already facing tough content comparisons, lapping the end of Ozark and the beginning of Stranger Things season 4 (in Q2 2022), he noted. He has a $350 price target.
Investors are set to learn more about a key competitive thread Wednesday as Warner Bros. Discovery details plans for its combined streaming service. Also, Netflix (NFLX) has announced plans to add to its Stranger Things content well with a new animated series.