Morgan Stanley’s Benjamin Swinburne is unlikely to be the only one to refer to Kate Bush’s song from the Netflix hit series stranger things as Wall Street braces for the global streamer’s second-quarter earnings report on Tuesday.
“Running Up That Hill,” the analyst captioned his July 12 report, referring to the singer’s 1985 song that appeared in it stranger things Season four and then topping the charts worldwide this summer. Like his peers and management, Swinburne is forecasting a second straight quarter of subscriber losses, with Netflix’s global tally of 221.6 million likely to shrink. The expert expects Netflix “to remain in line with the global forecast for paid net additions (-2m), but we see potential downside risks from mobile app download trends and reduce our net additions in Q3 (+1.55m versus +2 previously). Millions). ) to account for increased churn after the release of stranger things Season 4.” Swinburne also lowered its 2023 subscriber growth forecast to 7.9 million from 9.3 million and its price target to $220 from $300, while maintaining an “equiweight” rating on the stock.
Swinburne went into more detail on rising inflation and talk of a recession, predicting both could hit Netflix. “Video streaming revenue could prove more vulnerable than expected to a global recession and lower consumer spending,” he argued. “While Netflix’s leadership exposure should help retain customers, its relative price premium is likely to offset this as consumers look to trim their streaming bills.”
But the Morgan Stanley expert also touted the streamer’s planned launch of a cheaper, ad-supported subscription tier. “Long-term unlocking of the $160 billion global video advertising investment opportunity should allow Netflix to drive average revenue per user (ARPU) growth without relying on consumer price increases,” Swinburne wrote. Finally, the analyst noted that investors’ perspectives on Netflix will change over time: “Net brings meaning to stocks, but longer-term ARPU growth expectations are more important.” Finally, historically, “most of Netflix’s revenue growth has come from attributed to net additions or customer growth. As the business matures, ARPU is shifting from a secondary to a primary driver.” As such, he expects Netflix to “continue to prioritize ARPU growth, including further price increases.”
In a July 12 report, benchmark analyst Matthew Harrigan similarly highlighted, “Long-term leveraging the opportunity to spend $160 billion on video advertising globally should allow Netflix to drive ARPU growth without relying on consumer price hikes . In markets with high ad ARPUs, like the US, Netflix can offer a much cheaper deal and unlock additional net additions without sacrificing unit economics. Advertising may also prove to be a consumer-friendly way to monetize password sharing.” Harrigan also pointed to the changes the AVOD push could bring to Netflix culture. “Deviating from its DNA, Netflix must also disclose full viewing information to meet advertising market transparency and third-party requirements,” he argued.
Wells Fargo analyst Steven Cahall noted in a July 13 report that his team’s analysis of monthly active user data implied a net subscriber decline of just 1 million in the second quarter. But he stuck by his 2 million decline forecast, in line with management guidance. “The main reason for our unchanged estimates is low conviction, as we believe the historically correlated metrics are currently less relevant to Netflix, which appears to be experiencing a new phase of customer churn,” he explained. “As such, previous correlations are proving to be less reliable and we don’t think there is enough evidence to point to a bullish earnings outlook.” on undergrowth and exchange rate headwinds for financials.”
So what should investors expect from Netflix in terms of subscriber projections for the current quarter? “We’re sensing low conviction across the street, so this is another wait-and-see quarter where investors are likely to reset,” Cahall wrote.
Bank of America analyst Nat Schindler reiterated his “underperform” rating on Netflix in a June 23 report, but lowered his price target to $196 from $240 “given current market conditions, rising costs of producing content, as well as several potentially costly initiatives.” Schindler added, “While our survey shows that Netflix is currently the consumer’s choice of choice, we believe our results indicate that post-pandemic streaming has become mainstream very quickly, where original content is an important differentiator for a user to subscribe to the service.”
The rise in domestic subscriptions to Netflix “appears to be at or very near its peak,” argued the Bank of America analyst. “The availability of more services on top of competitors’ more compelling value propositions has resulted in customers subscribing to more services overall while still retaining Netflix. However, should a recession hit, it would not be surprising to see increased churn.”
In the short term, however, it remains with subtrends. Cowen analyst John Blackledge highlighted this in his earnings preview that included this snack: “Net, we expect investors to continue to focus on net underperformance in the (earnings report) as well as the guidance for the third quarter.” He predicts a net paid decline of 2 million users, “given macros, competition and password sharing.” However, due to the upcoming ad level, he slightly raised his net growth forecast for 2023.
“Netflix shares are down 46 percent (and down 69 percent year-to-date) since first-quarter earnings on April 19, with the decline reflecting the broader trend in tech-sector stocks and Netflix-specific challenges (high existing market penetration). reflected in some markets along with password sharing, increased competition and macro issues),” Blackledge pointed out. “Meanwhile, in our view, the stock pullback has resulted in a more attractive valuation before the service likely launches an ad-supported tier, which we estimate will generate approximately 4 million additional US/Canada subscriptions and significant upside potential for ’23 US / Revenue from Canada.”
Wall Street awaits further updates on a planned crackdown on password sharing and the introduction of a cheaper AVOD, ie an advertising-supported subscriber tier. After all, Netflix announced on July 13 that it had selected Microsoft as its global advertising technology and distribution partner. “We await further details on AVOD rollout, password sharing and rethinking content strategy to fuel sub growth,” Cahall said. “We believe the bias for estimate revisions in the second half of the year is down.”