Netflix (NASDAQ: NFLX) stock is up over 15% in the last 10 days as analysts grow increasingly more positive on the outlook for the online streaming giant. Most recently, Moody’s hiked the company’s bond rating to investment grade.
Shares of the streaming service giant are up about 17% year-to-date (YTD), outperforming the S&P 500 (+7%).
NFLX weekly chart (Source: TradingView)
New Initiatives to Re-accelerate Growth
Netflix launched its paid sharing program earlier this year, with the aim of generating revenue from users who have previously shared their passwords with individuals outside their households. Netflix anticipates that some users who had been accessing the platform through borrowed accounts would stop watching content, as they do not qualify as extra members to current accounts and do not convert to paid subscribers.
The paid sharing system was rolled out in Canada, New Zealand, Portugal, and Spain. The company plans to launch the program in other countries in the coming months, including the US.
After years of allowing its users to share passwords, the company announced plans last year to “monetize account sharing” after seeing the worst subscriber loss in 10 years.
The price extra members would have to pay in the US is not yet revealed, but some estimates predict it would cost around $7.50 per month.
On average, Netflix is charging extra members in Canada, New Zealand, Portugal, and Spain at around 43% of the price of a standard plan in each of those four countries. The cost is highest in Canada, at almost 50% of the standard plan cost there.
Netflix’s standard plan costs $15.49 per month in the US, meaning that the price for extra members would be around $7.50 per month assuming the company applies the Canadian practice.
Extra members have to create their own account and password to start using the platform, though that extra member slot is paid for by the account owner who invited them to join the membership.
Recent Actions Generate Positive Reaction From Analysts
Moody’s, a financial services firm that provides investors with credit ratings, moved Netflix out of the so-called junk rating level after a similar decision by S&P Global Ratings.
“Moody’s anticipates that growth in subscribers from the recently launched ad supported service will be gradual but steady and provide a strong long-term opportunity for revenue growth,” the ratings provider wrote in a statement.
Similarly, analysts at Wells Fargo reiterated their Overweight rating on NFLX and maintained the price target of $400 per share on the stock following the firm’s deep analysis of Netflix’s paid sharing efforts.
According to analysts, the recent rally in Netflix shares signals “early bullishness around the paid sharing opportunity.”
“While much has been written on AVOD, paid sharing is arguably the bigger near-term earnings opportunity given some 100mm global paid sharers incl. 30mm domestically… Significant upward revisions look likely,” Wells Fargo analysts wrote in a note sent to clients.
Analysts also underscored the Wall Street estimates that Netflix will add 15 million subscribers in 2023, leading to increased optimism about the streaming platform. Wells Fargo believes Netflix could see more than 20 million new paid sharing subscribers alone.
“Our base case is paid sharing will deliver incremental revenue of nearly $3bn, so if we’re in the ballpark, it implies ’24E Street revenue is far too low since AVOD and base subscription revenue is also growing,” they added.
Further, analysts still think NFLX offers an appealing entry for investors despite the stock’s 17% surge since the start of the year.
Moreover, Wells Fargo also thinks that Netflix shares stand a realistic opportunity to hit $430 apiece and even as high as $560 per share “using our bull case earnings per share (EPS),” the firm wrote. Analysts added that first-quarter comments on paid sharing efforts could offer an additional boost for the stock.
Corner Turned?
Netflix smashed Wall Street expectations for the number of paid subscribers in Q4 2022, though its EPS results fell short of estimates. The company added 7.66 million paid subscribers in Q4, compared to the estimated 4.57 million.
EPS stood at 12 cents in the quarter, well below the consensus estimates of 45 cents per share. Revenue matched analysts’ estimates of $7.85 billion, according to Refinitiv. But while Netflix’s EPS missed the consensus projections mainly due to euro-denominated debt, the company’s margins of 7% exceeded estimates.
Q4 2022 was the first quarter the company’s recently launched ad-supported service was included in its earnings report. Netflix launched the service in November 2022, though it has not revealed what portion of the subscriptions came from users who opted for the new plan.
Source: Netflix
During the earnings call, Netflix noted a comparable engagement from those who subscribed to the ad-supported plan as it has seen from regular subscribers. The company said there wasn’t a significant number of users who switched plans, meaning that those who are subscribed to premium plans are rarely downgrading to cheaper models.
“We wouldn’t be getting into this business if it couldn’t be a meaningful portion of our business,” said Netflix CFO Spencer Neumann. “We’re over $30 billion in revenue, almost $32 billion in revenue, in 2022 and we wouldn’t get into a business like this if we didn’t believe it could be bigger than at least 10% of our revenue.”
Netflix said it will no longer provide subscriber forecasts, though it will continue disclosing this data in future earnings reports. The idea behind the decision is to focus on revenue as its primary top-line metric instead of concentrating on subscriber growth.
The company added it expects revenue growth in Q1 2023 to increase by 4%, topping the consensus projections of 3.7%. The company said growth would be mainly driven by a higher number of paid subscribers and more money per paid membership.
Summary
Netflix shares are outperforming the wider market on the back of a positive reception to the company’s recent actions aimed at cracking down on password sharing. Analysts are also more positive on the company’s fundamentals after a robust earnings report delivered in January. Despite a recent outperformance, Wells Fargo analysts see room for more upside in shares.
By Vahid Karaahmetovic
