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What Wall Street is Saying About Netflix Ahead of Earnings

Posted July 19, 2023 at 10:00 am
Jason Keil
The Fly

Netflix reports with expectations high amid password sharing crackdown

Netflix (NFLX) is scheduled to report its second quarter results and business outlook on Wednesday, July 19. A video interview with Netflix executives, including co-CEOs Ted Sarandos and Greg Peters, will follow at 6:00 pm ET. What to watch:

SUBSCRIBERS: 

Netflix’s membership trends are a closely-watched measure of the company’s growth trajectory. In the first quarter, the company reported that average paid memberships increased 4% year-over-year and said that paid net adds amounted to 1.8M.

Netflix also said in its quarterly letter to investors: “We’re pleased with the most recent launches of paid sharing, and while we could have launched broadly in Q1, we found opportunities to improve the experience for members. We learn more with each rollout and we’ve incorporated the latest learnings, which we think will lead to even better results. To implement these changes, we shifted out the timing of the broad launch from late Q1 to Q2. While this means that some of the expected membership growth and revenue benefit will fall in Q3 rather than Q2, we believe this will result in a better outcome for both our members and our business… The majority of our year over year F/X neutral revenue growth in Q2 is expected to come from growth in our paid membership base. This translates into Q2 paid net adds that are roughly similar to Q1’23.”

On the day after the company’s last earnings report, Jefferies lowered the firm’s price target on Netflix. Q1 revenue was in-line with both Street and Jefferies’ estimates despite “a minor miss” on paid net adds, said the firm, which added that the Q2 guidance was “a bit light of Street” forecasts given the timing of the paid sharing full rollout.

More recently, Jefferies raised the firm’s price target on Netflix ahead of the company’s Q2 report due Wednesday after the bell. The firm says it expects “a strong quarter against high expectations” as its checks continue to firm up its belief in a longer-than-expected tail of growth as Netflix converts password borrowers into subscribers. Combining this with a stable content budget leads the firm to higher confidence in its “above-consensus” adjusted EBITDA and free cash flow estimates for 2024/2025, the analyst added.

STRIKES ONE AND TWO: 

On May 2, the Writers Guild of America said that after not reaching an agreement with Hollywood studios and streamer, its members will be on strike after its contract expired at midnight. “Your WGA Negotiating Committee spent the last six weeks negotiating with Netflix, Amazon (AMZN), Apple (AAPL), Disney (DIS), Discovery-Warner (WBA), NBC Universal, Paramount (PARA) and Sony (SONY) under the umbrella of the Alliance of Motion Picture and Television Producers,” the union told its members. It added, “Though we negotiated intent on making a fair deal-and though your strike vote gave us the leverage to make some gains – the studios’ responses to our proposals have been wholly insufficient, given the existential crisis writers are facing.”

On July 13, SAG-AFTRA, which identifies itself as “the world’s largest labor union representing performers and broadcasters,” announced that its members have elected to go on strike.

The union stated after announcing its strike: “Here’s the simple truth: We’re up against a system where those in charge of multibillion-dollar media conglomerates are rewarded for exploiting workers. The companies represented by the Alliance of Motion Picture and Television Producers — which include Amazon/MGM, Apple, Disney/ABC/Fox, NBCUniversal, Netflix, Paramount/CBS, Sony, Warner Bros. Discovery (HBO), and others — are committed to prioritizing shareholders and Wall Street.”

Eric Savitz noted in this week’s edition of Barron’s that Netflix’s second quarter earnings report arrives amid parallel strikes by Hollywood’s actors and writers, the first time both groups have hit the picket lines at the same time since 1960. Both groups are focused not just on improved pay but on how streaming is changing the entertainment business. Netflix has been dealing with a shifting landscape for more than a year now, and this quarter’s financial results should begin to reflect the company’s restructured business model, added Barron’s.

Meanwhile, Reuters opined that Netflix will likely survive striking Hollywood actors for the time being, as the company will likely keep churning out movies and television shows already in its pipeline. The streaming giant has a lot of its content from countries not involved in the SAG-AFTRA strike, and is also not tethered to parts of the entertainment sector that are struggling, such as movie theaters and broadcast television, the publication added.

BEARISH VIEW: 

In its own preview published this week, Benchmark raised the firm’s price target on Netflix. With the stock now trading 36% and 27% above its 200-day and 50-day moving averages, respectively, the market is “avidly recognizing Netflix’s advantages in navigating the dual WGA/SAG strikes,” the analyst tells investors. While Netflix’s advantages as far as new content inventory and more significant overseas production may not be subject to the U.S. labor shutdown, it is “conceivable 2024 growth could be dampened by prolonged strikes,” argues the analyst, who notes the firm’s increased price target is “almost entirely due to recognizing fair value off a forecast extending all the way through 2033,” versus the truncated 2027 alternative the firm had applied earlier.

COMPETITION: 

On July 13, Disney CEO Bob Iger stated while being interviewed from the Sun Valley conference by CNBC’s David Faber that he sees the company coming to agreement with Comcast (CMCSA) to buy the rest of Hulu. The Disney+ and Hulu apps will be merged by the end of this year, Iger stated, adding that Disney is “better off having Hulu than not having Hulu.”

Iger said it was the “right decision” to go into streaming, which “will be a growth business.” The CEO added that the company is “not going to rule out” doing “some licensing” of content.

Subsequently, Wells Fargo analyst Steven Cahall kept the same rating on Disney after Iger said on CNBC that the company may consider divestiture of non-core linear networks, excluding ESPN. The analyst likes the possibility of divestitures and estimates potential accretion of 10% or $10 per share. Bigger picture, Disney “seems to be taking increasingly bold actions,” the analyst told investors. Wells says divesting non-core linear networks assets would bring in cash and improve Disney’s earnings growth.

Originally Posted July 18, 2023 – What Wall Street is saying about Netflix ahead of earnings

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