Updated at 9:42 amEDT
Netflix shares fell in early trading Thursday, paring some of the stock's $53 billion gain so far this year, as investors eyed the streaming giant's first-quarter earnings update after the closing bell.
Netflix (NFLX) underwent a massive crackdown on password sharing last year as it pivoted toward an advertising-based model that its founder and former CEO, Reed Hastings, had long resisted but emerged as the clear winner in the elections. global streaming wars with a base of more than 260 users. million subscribers.
“Netflix has leapfrogged the competition and everyone is still playing for a distant second place,” KeyBanc Capital Markets analyst Brandon Nispel said in a recent study on the direct-to-consumer streaming sector. “Commitment is what matters, and even if we bundle services, chances are no one will come close.”
The group has also managed to produce successful new content, including shows such as “Avatar: The Last Airbender”, “Fool Me Once” and “The Gentlemen”, while reducing spending on content, focusing on profits and margins instead. to gain new subscribers. .
In fact, this last tactic has become much more difficult in US markets, as the pace of streaming growth last year fell more than 50% compared to 2022 and consumers are reducing spending on entertainment post-pandemic.
Netflix's US market share is also falling noticeably. Research group Antenna last estimated it at around 25% late last year, down from levels close to 50% during the Covid era.
Netflix: profit over growth
This forced Netflix to focus on profits and margins, as well as its overseas growth strategy, as it seeks to solidify its overall position while ensuring lower subscriber churn rates.
“Other studios and streamers have survival imperatives to improve their streaming execution, although we still expect Netflix to remain a leader against content-rich traditional media companies (Disney+, Max, Paramount), as well as Apple TV, amazon, etc. .,” said benchmark analyst Matthew Harrigan.
However, subscriber growth rates remain key, both in terms of the group's new ad-supported platform, priced at $6.99 a month at the lowest tier, and its ad-free plan, where the price has jumped from $11.99 a month. advance to $15.49 per month.
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The increases probably didn't slow subscriber growth during the first quarter, with analysts expecting an overall gain of about 5.1 million (nearly three times the previous year's figure of 1.75 million), but they could have an impact. longer term over the next year.
That impact could prove to be a net positive for Netflix, however, as rivals facing higher churn among their own subscriber bases resort to licensing content to the market leader to make up for lost revenue.
Winner of the streaming war?
“While this is a profitable revenue stream for legacy media companies, it is also something that benefits Netflix's audience and supports both price increases and advertising revenue,” said KeyBanc's Nispel. “With pay-sharing doing well and advertising starting to pick up, Netflix seems well-positioned to us for next year.”
BMO Capital Markets analyst Brain Pitz, who raised his Netflix price target by $75 to $713 per share earlier this week, also sees the group benefiting from an $8 billion shift in spending that will migrate from US linear television to streaming platforms in the next three years. .
Netflix, Pitz maintains, could capture about a third of that figure, and almost a quarter of the expected $20 billion globally, and he expects Netflix to amass some 54 million advertising subscribers by the end of next year.
For the three months ended in March, analysts expect Netflix to post a bottom line of $4.52 per share, an increase of 57% from the prior-year period, on revenue of $9.28 billion.
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That's likely to mean a 3.5 percentage point widening in gross margins, which are forecast at 44.6%, as well as a big focus on the group's $17 billion content spending plans for the rest of the year.
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“We expect another strong first-quarter result as Netflix highlights its ability to grow even while taking significant price increases,” said Pivotal Research analyst Jeff Wlodarczak, who has a buy rating and last week raised his price target. at $65 to a Wall Street high. $765 in shares.
“Netflix continues to be a strong absolute and relative value to its consumer video entertainment peers, which combined with a strong content offering, the positive effects of advertising and the decline of competition in content availability make it “Netflix continues to generate solid subscriber growth,” he added.
KeyBanc's Nispel currently rates Netflix as “overweight” with a target of $725. Benchmark's Harrigan rates it a sell with a $440 price target.
Netflix shares fell 0.85% early Thursday to $608.60 each; a move would still leave the stock with a year-to-date gain of about 30%.
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