Netflix - Subscriber Growth or Stagnation?

Netflix has reinvented the wheel over the past year or two. From massive subscriber growth during the pandemic to ad-supported subscriptions as audience growth peaked, what’s next for the streaming giant? Netflix is our pick for stock of the week.

Zooming out to a weekly chart is the best way to view the evolution of the Netflix share price since the pandemic started. The peak subscriber growth narrative hit in Q4 2021, and the market duly punished the company, sending shares into a sharp downtrend lower as soon as the exponential growth story ended.

There were multiple factors to point fingers at. The excessively low rates of the Covid era, over-valuation, market saturation and increased competition were chief among them. At the time Co-CEO Reece Hastings said:

“Consumers have always had many choices when it comes to their entertainment time — competition that has only intensified over the last 24 months as entertainment companies all around the world develop their own streaming offering. While this added competition may be affecting our marginal growth some, we continue to grow in every country and region in which these new streaming alternatives have launched.”

It’s far from game over for the company, but the turn did usher in a new era. One of maturity as a going concern rather than ‘growth at all costs’. In Q3 2022, subscriber metrics were actually improved. 2.4 million new subscribers were added to the roster, and there are hopes that the new ad-supported tier can, over time, bring in new additions too.

There was also a big crackdown on password-sharing. Netflix is set to report earnings for Q4 2022 after the Nasdaq close on Thursday (January 19th). The market will be looking for progress on this front alongside the usual quarterly revenues and earnings.

• Estimated Quarterly EPS $0.44
• Estimated Quarterly Revenues $7.82bln

The weaker dollar should be a supportive factor for the company’s revenues. Netflix doesn’t hedge their FX exposure so a strong dollar hit them harder than most in the first 9 months of last 2022.

Perhaps most important will be the forward-looking perspective. How are consumers holding up? Are there early signs of subscriber fatigue and/or customers dropping into the ad-supported tier to save a few $ per month?

Goldman Sachs maintains a sell rating on the stock with a price target of $225. There are plenty of reasons to see weakness in a consumer discretionary name heading into a widely-expected economic slowdown. So perhaps the more interesting way to frame this is why wouldn’t Netflix shares come under renewed pressure?

Goldman has some ideas to consider:

• Subscriber growth (surprising to the upside vs. our estimates);
• Price increases with minimal churn resulting in higher operating estimates
• Better than expected cost savings coupled with pricing power and slowdown on content spend resulting in higher margins vs. our estimates
• Faster than expected execution on both password sharing and ad-supported tier
• Industry competition abating & impact on subscriber growth, original content and consumer attention.

If the price is to fall, perhaps it will take more than an earnings report and some company chatter. If the economy turns and customers decide to start cutting subscriptions, it’s unlikely the market would see that as a positive.