Disney+ sprinted past Netflix Inc. for the mantle of most-popular streaming service this year, and executives at Netflix are in serious damage-control mode.
On Thursday, Netflix
NFLX,
announced an advertising-supported offering for $6.99 a month, which executives hope will welcome back viewers who cancelled their subscriptions to check out cheaper, younger rivals. The move follows a push into videogames that was meant to sustain engagement with subscribers even when they weren’t watching movies or shows, and precedes another big move: Cracking down on password sharing.
Read more: Ads are coming to Netflix in November with plan costing $6.99 a month
The many moving parts reflect a company at a crossroads as third-quarter results arrive Tuesday. Netflix finds itself behind Walt Disney Co.
DIS,
in total streaming subscribers, and facing intensifying pressure from growing streaming services offered by Apple Inc.
AAPL,
Amazon.com Inc.
AMZN,
Warner Bros. Discovery Inc.
WBD,
and Comcast Corp.
CMCSA,
Netflix is likely to especially feel the pinch in the saturated U.S. consumer video-streaming market: Market researcher Insider Intelligence expects the company to suffer its first year of negative growth, while Disney+ continues double-digit growth and tops 100 million users this year.
“Netflix is losing viewers to lower-priced competitors that are pouring massive resources into content development,” said Oscar Bruce Jr., senior forecasting analyst at Insider Intelligence. “Its price increase and the availability of bundles and deals for other services have put Netflix at a big disadvantage as consumers deal with soaring inflation.”
Despite it all, Netflix shares are up 34% since it announced second-quarter results on July 19, with investors seemingly betting that the huge decline in the stock after growth hit a snag — shares are down 61% this year, reflecting a wide-ranging tech selloff as well as the daunting competition that Netflix continues to face — will be short-lived.
The numbers make ad-supported streaming seem like a good idea: 46% of current Netflix users would consider shifting to an ad-supported model once it is available, according to a survey of 1,300 Netflix users by software company Samba TV. J.P. Morgan analyst Doug Anmuth believes the ad-supported tier in the U.S. and Canada could generate revenue of about $1.2 billion in 2023 and $4.6 billion by 2026.
Anmuth believes the move could lead to “re-accelerating revenue, expanding Netflix’s SAM [serviceable available market], and driving greater profitability,” he said in a note Monday. Anmuth has a neutral rating on the stock with a $240 price target.
Truist Securities analyst Matthew Thornton forecasts a more stringent policy toward password sharing could lift members by 3% by 2024 at a “high-incremental margin,” although Netflix does risk losing some members due to backlash. He maintains a hold rating on Netflix with a price target of $210.
Analysts expect Netflix to add 1.11 million net paid subscribers in Q3, a marked improvement from the two previous quarters, when it lost more than 1 million subscribers in total. Many eyes will be on executives’ forecast for the fourth quarter, with the ad-supported offering expected to land in 11 countries in early November: Analysts currently expect a net addition of 4 million subscribers in the final three months of the year, and investors will want to know if Netflix’s leaders see it the same way.
What to expect
Earnings: Analysts surveyed by FactSet expect, on average, Netflix to report third-quarter earnings of $2.14 a share. A year ago, analysts were projecting $3.19 a share, showing how expectations have changed amid Netflix’s growth challenges.
Contributors to Estimize — a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others — are also projecting earnings of $2.14 a share on average.
Revenue: Analysts on average expect Netflix to report $7.84 billion in third-quarter revenue, up from $7.48 billion a year ago. Estimize contributors also predict $7.84 billion on average.
Stock movement: As of the end of Thursday’s session, Netflix’s stock has plummeted 61% this year — among the worst Nasdaq-100
NDX,
performers — while the S&P 500 index
SPX,
has stumbled 23%. Shares of Netflix have bounced back 34% since the company announced second-quarter results in mid-July.
What analysts are saying
The hemorrhaging of Netflix subscribers — or at least a deceleration — has allowed Disney to catapult into the top spot for now and allowed others to gain ground. But Netflix has acted quickly to jack up revenue with initiatives covering a first-time advertising platform, a crackdown on shared passwords, and a foray into gaming — much to the relief of financial analysts.
“We believe that the new tier could drive an incremental 4 million subs in the U.S. alone and should drive further sub penetration,” Cowen analyst John Blackledge said in an Oct. 13 note that maintained an outperform rating on Netflix shares and a price target of $325.
Not every analyst shares that view, however.
“Our view remains unchanged we see the move to offer an ad-supported tier by the global streaming incumbent player as defensive not offensive and fraught with [average revenue per user], technological, product perception, results variability risk,” Jeffrey Wlodarczak, analyst at Pivotal Research Group, said in an Oct. 11 note. “In key market US/Canada in particular we doubt that an ad-supported tier is going to allow NFLX to return to annual subscriber growth as NFLX appears near fully penetrated.”
“It will be interesting to see how they acquire content. Before, they did business with the backing of a stock price that was very high,” Jon Christian, executive vice president of digital supply chain at Qvest U.S., told MarketWatch. “It is extremely important for them to find episodic franchises. Will they spend on sports? I’m excited to see the ad revenue model.”
“In the beginning, Netflix paved the path to a massive rise in ad-free Subscription Video on Demand (SVOD) services. Now, the company’s launch of Basic With Ads is the next catalyst to move the industry forward, and likely to only increase the profile of CTV for advertisers,” Sean Doherty Jr., chief operating officer at connected-TV company Wurl, told MarketWatch.
