Wall Street Rejects Netflix As Its Favorite Promotion: Now What?

The recession, the stock price cuts and the colorful language – that was Wall Street’s reaction to the sudden loss of 200,000 Netflix subscribers in the first quarter and 2 million more users in the second quarter, anticipating a major recession.

At least some analysts also said a day after the streaming giant’s earnings that Netflix is ​​no longer their favorite stock idea. And much of the discussion in the reports has focused on Netflix’s new initiatives, such as cracking down on password sharing and planned low-cost, ad-supported subscription levels. In early trading, the stock was down 30 percent to $244.01.

“Tudunzo,” Wells Fargo analyst Stephen Kehol named his Wednesday record after Netflix’s famous “tudum” startup sound and the fact that he sees the Netflix story as “Dunzo.” He cut stocks from “overweight” to “equal weight” and cut the stock price from $600 to $300. “In our opinion, negative growth and investment to accelerate revenue recovery is a nail. In the hole.” Netflix’s coffin,” he argued. . “The new perspective is clear as mud.”

Meanwhile, Pivotal Research Group CEO Jeff Wlodarczak highlighted the “shocking” results and the company’s guidance to reduce inventory from “sell” to “sell”. It also lowered its price from $550 to $235.

“From an equity perspective, the investment community is unlikely to welcome a period of rising interest rates that yields material returns,” Wlodarczak said. “This hype is likely to exacerbate investor concerns that: 1) the company will be at a disadvantage in H1 22 and broadcast appears to have almost fully penetrated post-COVID globally (whether that involves piracy or equity conversion or price manipulation). ); 2) the increasing effect of competition when competitors offer their services globally, some of which may not yet be focused on piracy or even profitability in the case of Apple or Amazon; 3) Higher investment in growth appears to raise cost barriers for all streaming players, leading to even higher cost inflation (partially offset by even higher barriers to entry); And 4) in this context, the major players are probably not cheap.

“Reality bites,” said Michael Morris, a Guggenheim analyst, in the title of his report. While continuing to rate Netflix stock as “buy,” he lowered his price target from $555 to $350, emphasizing, “We’re also opening up Netflix as our best idea for the Big Room of Surprises.”

Comments from senior executives, including CEOs Reed Hastings and Ted Sarandos, were also included in their reports and others. “While management sees ‘creative excellence’ and accelerating revenue growth driven by new monetization over the next 18 months, we have significantly reduced our membership and financial growth outlook over the next decade, which has significantly lowered our rating target. explained Morris.

Daniel Salmon, an analyst at BMO Capital Markets, which has an “improved” rating on Netflix, cut its stock price from $640 to $405 to reflect lower cash flow ratings, risk-free rates and premiums. taller. Allowing for slow and steady growth. He added that Netflix is ​​now “no longer [our] The best option for the closest reverse wind.” Your new “order” for great digital deals is: Amazon, Netflix, Alphabet/Google.

The BMO expert also noted the stream giant’s modified approach. “We believe management has completed the narrative transition by giving in to the hype and mechanically breaching member/subscriber metrics by revealing 100 million ‘password sharers’. And if the stock trades 13 times our new adjusted earnings before interest, taxes, depreciation and amortization estimated for 2024 (compared to 23% growth), the (investor) growth must end before moving to GARP (growth at a reasonable price). “, – writes Salmon.

Cowen analyst John Blacklage maintained his “best” rating on Netflix stock but lowered its price from $590 to $325. “Given the results and guidance, we have reduced our short-term and long-term forecasts,” wrote Blackleg. “Management does not expect revenue growth to accelerate again, potentially in 24 years or possibly sooner, based on the success of the new level of advertising, time and scale, and the conversion of families who share passwords. Despite the pessimistic outlook, Netflix expects to keep its operating margin between 19% and 20% until revenue picks up again. Netflix also expects free cash flow at age 22 to be positive and grow from here.

With a loss of 200,000 subscribers in the first quarter due to lack of customers, a Cowen expert concluded that this was “primarily due to shrinking adult markets” and explained: High penetration, coupled with password sharing, increased competition and macro issues , are all due to a decrease of 2 million users in the second quarter of this year (1.09 million vs. forecast), while net additions were lower than expected in the US/Canada, Europe/Middle East/Northern Africa and Latin America.

A Wall Street View of Netflix’s Ad Level Plans

Analysts have spent a lot of time discussing Netflix’s plans to roll out a lower price tier for ad-supported subscribers. “We have increased our initial advertising contribution (pre-modeled as net income) from the end of 2023 and will achieve a revenue contribution of $4 billion by 2030,” wrote Guggenheim Morris. In this context, we estimate that Hulu generated over $3 billion in ad revenue last year, with around 88% of its subscribers receiving ad-supported versions. While we don’t expect Netflix to have the same mix, we do see it nearly doubled its share (6.4%) of total US TV time versus Hulu (3.0%) in February 2022, according to Nielsen. . Also, Netflix is ​​a global service against Hulu being in the US.

Salmon from BMO Capital Markets also shared his thoughts on the advertising strategy. “Netflix is ​​unlikely to reinvent the wheel, and investors should expect an initial focus on branding rather than direct response, involvement in private market software pipelines,” he argued, noting “read the beneficiaries.” Netflix’s expected branding approach makes TradeDesk a “first demand partner,” she argued. “The hereditary relationship with Roku also makes him a potential mate candidate.” Online ad technology companies Magnite and Innovid could also benefit, he argued.

Wells Fargo’s Cahall argued that the US and Canada “represent this huge opportunity for AVOD as we estimate that around 70-80% of Hulu subscribers write ad-free tiers”. He added: “Ad-supported subscribers earn about $8.50 a month in ad ARPU under our Disney model, which adds up to $6.99 a month to subscribe to ad-supported ARPU services. This makes the ad-supported product more profitable as ad-free Hulu costs $12.99 a month.”

What is Netflix looking for? “Netflix will likely improve both net addition and revenue from future levels of advertising,” Kehol said. “Assuming a long-term average ad revenue per user (ARPU) similar to that of Netflix locally, you might consider pricing an ad-level subscriber component supported at about $10 per month, or about 50 cents. discount per month. Given the scale of the audience, we believe advertising equal to or greater than Hulu ARPU is a reasonable assumption in the medium term. The same evolution is likely to occur in international markets.”

But Kahol cautioned: “It’s impossible to know when the ad will run, what the price will be, how many subscriptions will go to advertising, and how many additional subscriptions will come from supposedly cheaper, ad-supported access tiers.” . Given this unknown, both nationally and internationally, we currently do not create advertising models by essentially writing subscribers or revenue. ”

Shared password hack

Wall Street watchers also discussed their latest thoughts on Netflix’s increasing attempts to share passwords.

“Password sharing remains an ongoing issue for all streaming media services,” said Paolo Pescator, a prospective analyst at PP. “Capture can help us, but it may not be a one-size-fits-all solution. There will be dissatisfied subscribers who can unsubscribe immediately. Netflix will have to experiment with different pricing tiers to cater to different audiences. In the first case, a cheap AVOD offer can help convert free downloaders. ”

Kehol noted that password sharing “is now a reaction to a tougher market.” He added: “It was always an opportunity, but we think it got here a little faster than investors expected, meaning the slow growth would slow sooner than planned.” Therefore, we believe the narrative impact is offset by potentially additional subsidies and revenues. This, of course, can change over time. ”

When management indicates that its data indicates that approximately 100 million users are given passwords, including about 30 million in the United States and Canada, “that means there must be a significant opportunity to generate some revenue,” the analyst concluded. .

Morris also summarized the password sharing data shared by the administration. This means that the total effective penetration in the address market (based on broadband reports) is 50% higher than the penetration based on the levels reported by members. “Management continues to expand testing (currently available in three Latin American markets) to monetize additional users through ‘paid sharing features’, which are expected to contribute more significantly to account revenue (not revenue levels). association) by 2023”.