Morgan Stanley’s Benjamin Swinburne may not be the only one to quote Kate Bush’s song from hit Netflix series Stranger Things Wall Street is gearing up for global streaming’s second-quarter earnings report on Tuesday.
The analyst named “Run Up That Mountain” in his July 12 report, citing the singer’s 1985 appearance on Stranger Things Season four, then topped the global charts this summer. Like his peers and management, Swinburne expects to lose subscribers for the second quarter in a row, and Netflix’s global figure of 221.6 million could be reduced.The expert expects Netflix to be “in line with global paid net addition guidance (-2 million), but we see potential downside risks to mobile app download trends and we trim Q3 net additions (+1.55 million) , compared to +2 million previously) ) factored in higher post-launch churn Stranger Things Season four. Swinburne also lowered its 2023 subscriber growth forecast to 7.9 million from 9.3 million and its price target to $220 from $300, but maintained an “equal weight” rating on the stock.
Swinburne addressed the discussion of rising inflation and recession in more detail, predicting that both could hit Netflix. “Streaming video revenue may be more vulnerable than expected to a global recession and lower levels of consumer spending,” he argued. “While Netflix’s leading engagement should help retain customers, its relative premium may be offset as consumers look to cut their streaming bills.”
But the Morgan Stanley expert also touted plans for the streaming to launch a cheaper, ad-supported subscription tier. “Longer term, leveraging the $160 billion global video ad spending opportunity should allow Netflix to drive average revenue per user (ARPU) growth while reducing its reliance on higher consumer prices,” Swinburne wrote. The analyst concludes by noting that investors’ perceptions of Netflix will change over time: “Net worth adds to the stock price, but long-term ARPU growth expectations are more important.” After all, in the past, “the majority of Netflix’s revenue growth came from Net additions or customer growth. ARPU is shifting from a secondary driver to a primary driver as the business matures.” That’s why he expects Netflix “will continue to prioritize ARPU growth, including continuing to raise prices.”
In a July 12 report, Benchmark analyst Matthew Harrigan similarly emphasized: “Longer term, leveraging the $160 billion global video ad spend opportunity should allow Netflix to drive ARPU growth while reducing price increases for consumers. Rely on. In markets with high advertising ARPU, such as the US, Netflix can offer significantly lower prices and unlock additional net revenue without sacrificing unit economics. Advertising may also prove to be a consumer-friendly Crypto sharing monetization.” Harrigan also pointed to the changes that the AVOD push could bring to Netflix’s culture. “From its DNA, Netflix must also disclose full viewing information to meet ad market transparency and third-party auditing requirements,” he argues.
Wells Fargo analyst Steven Cahall noted in a July 13 report that his team’s analysis of monthly active user data showed that net subscribers fell by just 1 million in the second quarter. But he stuck with his 2 million decline forecast, in line with management’s guidance. “The main driver of our unchanged estimate is low belief, as we believe historical correlation metrics are currently less correlated with Netflix, which appears to be going through a new phase of churn,” he explained. “As a result, previous correlations have proven unreliable, and we do not believe there is sufficient evidence for bullish earnings.” He stressed: “Our estimates for the second half also have a downside bias, including below-growth pressure and FX headwinds in financial stocks. .”
So, what should investors expect from Netflix in terms of current-quarter subscriber forecasts? “We sense low confidence across Wall Street, so this is another wait-and-see quarter, and investors may recalibrate after that,” Cajal 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, the low cost of content production up, as well as some potentially costly moves.” Schindler added: “Overall, while our survey indicates that Netflix is currently the top choice for consumers, we believe our results show that streaming has Quickly becoming a commoditized product, original content is a key differentiator for user subscriptions to the service.”
The Bank of America analyst believes that Netflix’s domestic subscriptions “appear to be at or near the peak.” “In addition to a more attractive competitor value proposition, the availability of more services leads customers to subscribe to more services overall, while still keeping Netflix. However, if the recession persists, seeing incremental churn will Not surprising.”
In the short term, it is still about subtrends after all. Cowen analyst John Blackledge also emphasized this in his earnings preview, which concluded: “Net-to-net, we expect investors to continue to focus on (earnings report) and the net sub-trajectory in Q3 guidance.” He predicts that paying subscribers will drop by 2 million “given macro, competition and password sharing.” But he slightly raised his net addition forecast for 2023 due to the upcoming ad tier.
“Netflix shares are down 46% since Q1 earnings on April 19 (and down 69% year-to-date), and the pullback reflects broader trends in tech stocks as well as Netflix-specific challenges (existing high penetration) in certain markets, as well as crypto sharing, increased competition and macro issues),” Blackledge emphasized. “Meanwhile, in our view, the stock pullback leads to a more attractive valuation ahead of the possible introduction of an ad-supported tier for the service, which we estimate could add about 4 million US/Canada subscribers and rise significantly to ‘ 23 US/Canadian Income.”
Wall Street did expect more updates on plans to crack down on password sharing and roll out cheaper AVODs, meaning an ad-supported subscriber tier. After all, Netflix announced on July 13 that it had chosen Microsoft as its global ad tech and sales partner. “We look forward to more details on the rollout of AVOD, password sharing, and a rethinking of content strategy to spur sub-growth,” Cahall said. “We think the bias in second-half estimate revisions is to the downside.”