It’s not just viewers of Netflix Inc. shows who have to wait and see how gripping developments will play out in the future. Netflix investors, too, are in a bit of a waiting game.
Thank you for reading this post, don't forget to subscribe!The streaming-media company is banking on a password-sharing crackdown and a recently launched advertising-supported tier of content to provide financial jolts, but it could take longer than initially anticipated for the results of these initiatives to manifest themselves. The company pushed a broad launch of the account-sharing clampdown into the second quarter from the first quarter as it assessed how to conduct the rollout.
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shares, which initially headed about 10% lower in aftermarket action Tuesday after the company missed subscriber expectations for the latest quarter and delivered a lower earnings outlook than anticipated, pared losses at the start of Wednesday’s regular session as investors wait for the full implementation of the new initiatives, which have shown some promise in early testing. The stock was down about 4% shortly after Wednesday’s open.
The latest report “kicks the can down the road,” according to Raymond James analyst Andrew Marok, who rates the stock at market perform.
“In all, this quarter does little to settle the debate on the scale of the paid sharing and ad tier opportunities,” he wrote. “Rather, the outlook has been put on pause momentarily before major market launches commence.”
Morgan Stanley’s Benjamin Swinburne took a similar view in his note titled “Delayed & Debated.”
“Paid sharing and the ad tier appear to be delivering at the micro level,” he wrote. “But their ability to deliver the robust expectations ahead and support [Netflix’s] premium multiple remains unresolved.”
Monness, Crespi, Hardt & Co. analyst Brian White added that while the most recent quarter was the first full period to benefit from the launch of the ad tier, “it was difficult to ascertain the impact it had on the business.” He rates the stock at neutral.
Other analysts saw more encouraging signals in the latest numbers. Peter Supino of Wolfe Research flagged Netflix’s disclosure that the economics of its domestic ad-supported tier were already better than those of the company’s standard plan. He sees Netflix’s two big revenue initiatives ultimately working together.
“As paid sharing gains traction, we expect investor focus to shift towards AVOD, which will be a much larger long-term driver,” Supino wrote, referring to ad-supported video on demand. He called paid sharing “an iterative process and extremely high-margin growth driver” that will start to take hold in the second quarter and beyond.
Supino rates Netflix shares at outperform with a $388 target price.
Wells Fargo’s Steven Cahall highlighted Netflix’s commentary on Canada, where the company has already begun an account-sharing crackdown. Co-Chief Executive Gregory Peters said that Netflix was “now in a positive member and positive revenue position” relative to before the rollout started.
“We think this bodes well for U.S. and Europe to accelerate revenue in [the second half] and beyond,” Cahall wrote in a note to clients, adding that the “vast majority of revenue markets should be done by [the second quarter].”
He has an overweight rating on shares.
Opinion: As the original Netflix dies, a new era of ads and password crackdowns is born
SVB MoffettNathanson’s Michael Nathanson chimed in that the comments on Canada and on the ad tier’s economics, along with Netflix’s latest expectations for content spending, “confirm that Netflix has the ability to generate more cash flow, re-generate revenue growth and hit second-half expectations.”
Still, he said that there’s “no way around the fact” that subscriber growth in the U.S. and Canada region has “topped out.”
“Given the imminent lapping of last year’s high-single-digit price increases, the monetization of the 30 million password-sharing households better work, as [U.S. and Canadian] revenues are estimated to decelerate from 8% in [the first quarter of 2023] to only 4% in [the second quarter],” he wrote.
See also: Netflix is sending its DVD-by-mail business to the Blockbuster graveyard
While the company is seeing subscriber growth in the Asia-Pacific region, Nathanson worries about the economics there, citing “lower and lower” trending revenue per user, or RPU.
“For those of us with long memories in the media space, the growth of low-RPU markets like India can often be fool’s gold, as low RPU is often the progeny of perpetual unprofitability,” he said in his note to clients, while reiterating a market-perform rating but boosting his price target to $350 from $315.
