Morgan Stanley’s Benjamin Swinburne probably won’t be the only one to reference Kate Bush’s song in the Netflix hit series Weird stuff as Wall Street gears up for the global streamer’s second quarter report on Tuesday.
“Running Up That Hill,” the analyst called his July 12 report, referring to the singer’s 1985 song that appeared in Weird stuff season four and topped the charts this summer. Like his colleagues and management, Swinburne predicts a second quarter of subscriber losses in a row, with Netflix’s global figure of 221.6 million likely to shrink. The expert expects Netflix “to remain in line with global guidance for paid net additions (-2 million), but we see potential downside risks from mobile app download trends, and we are reducing our net additions in the third quarter (+ 1.55 million vs previous +2 million). ) to account for increased churn after the release of Weird stuff Season 4.” Swinburne also lowered its 2023 subscriber growth forecast from 9.3 million to 7.9 million and its target price from $300 to $220, but kept its equal weight rating on the stock.
Taking a closer look at rising inflation, Swinburne spoke of a recession and predicted that both could hit Netflix. Streaming video revenue may prove more vulnerable than expected to a global recession and lower consumer spending, he argued. “While Netflix’s industry-leading engagement should help it retain customers, the relative price premium is likely to compensate as consumers look to lower their streaming bills.”
But the Morgan Stanley pundit also praised the streamer’s planned rollout of a cheaper, ad-supported subscription tier. “In the long run, if Netflix takes advantage of its $160 billion global video ad investment opportunities, Netflix should increase its average revenue per user (ARPU) with less reliance on consumer price increases,” Swinburne wrote. The analyst concluded by noting that the way investors view Netflix will change over time: “Net is adding to stocks, but longer-term ARPU growth expectations are more important.” After all, in the past, “Most of Netflix’s revenue growth has come from net acquisitions or customer growth. As the company matures, ARPU shifts from a secondary to a primary driver.” As a result, he expects Netflix to “continue to prioritize ARPU growth, including continuing to raise prices.”
In a July 12 report, Benchmark analyst Matthew Harrigan similarly emphasized: “If Netflix can handle global video ad spend of $160 billion in the long run, Netflix could drive ARPU growth with less reliance on consumer price increases. with high ad ARPUs, such as the US, Netflix can offer a significantly lower-priced offering and unlock additional net ads without sacrificing unit economy.Ads can also be a consumer-friendly way to monetize password sharing.” Harrigan also noted what changes the AVOD push could bring to Netflix culture: “Based on its DNA, Netflix will also need to release full viewing information to meet ad market transparency and the demands of third-party audits,” it argued. he.
Wells Fargo analyst Steven Cahall noted in a July 13 report that his team’s analysis of monthly active user data implies a net subscriber drop of just 1 million in the second quarter. But he stuck to his forecast of a 2 million decrease, in line with management guidelines. “The main reason for our unchanged estimates is low conviction, as we think the historically correlated metrics are less relevant at this point for Netflix, which appears to be entering a new phase of customer churn,” he explained. “As such, past correlations appear to be less reliable and we do not believe there is sufficient evidence to imply a bullish call in earnings.” And he emphasized, “We also have a downward bias on the second half estimates, including sub-growth pressures and currency headwinds for financial institutions.”
So what should investors expect from Netflix in terms of subscriber forecasts for the current quarter? “We feel low conviction across the street, so this is another wait-and-see quarter, with investors likely to reset after that,” Cahall wrote.
Bank of America analyst Nat Schindler reiterated his “underperform” rating on Netflix in a June 23 report, but lowered his price target from $240 to $196 “given current market conditions, rising costs of content production, and several potentially expensive initiatives.” ” Schindler added: “While our research indicates that Netflix is currently the number one choice for consumers, we believe that our results indicate that streaming has become a standard product very quickly after the pandemic, with original content being a key differentiator for a user to subscribe to the service.”
The domestic subscription run-up for Netflix “appears to be at or near its peak,” the Bank of America analyst argued. “The availability of more services alongside more compelling value propositions from competitors has resulted in customers generally subscribing to more services while keeping Netflix. However, if a recession were to break out, it wouldn’t be surprising to see increasing churn.”
After all, in the short term, these are subtrends. Cowen analyst John Blackledge emphasized the same in his earnings outlook, which had this takeaway: “Net net, we expect investors to remain focused on the net sub-trail in the (earnings report), as well as in the third quarter guide.” He predicts a paid net decline of 2 million users, “given macro, competition and password sharing.” But he increased his net 2023 projection slightly because of the upcoming ad tier.
“Netflix stocks are down 46 percent since Q1 gains on 4/19 (and 69 percent year-to-date), with the pullback reflecting the broader trend among tech sector stocks and Netflix-specific challenges (high existing penetration in some markets, along with password sharing, increased competition and macro issues),” Blackledge emphasized. “Meanwhile, we believe the stock pullback has led to a more attractive valuation ahead of the likely introduction of an ad-supported tier that we estimate could add approximately 4 million incremental US/Canada subs and provide a significant benefit to ’23 US/Canadian earnings.”
Wall Street does expect more updates on a planned password-sharing crackdown and the launch of a cheaper AVOD, i.e. ad-supported subscriber tiers. After all, Netflix revealed on July 13 that it has chosen Microsoft as its global advertising technology and sales partner. “We expect more details on the AVOD rollout, password sharing and any rethinking of the content strategy to drive sub-growth,” said Cahall. “We think the bias for revisions to estimates in the second half is downward.”