Driven by its initiative to crackdown on password-sharing and its ad-supported tier pulling in new members, Netflix’s (NASDAQ:NFLX) Q3 results showed that subscriber growth was back on tap again.
It’s a trend that appears to be continuing in this quarter, at least in the North American market. That is the conclusion reached by Wedbush analyst Alicia Reese, after scanning the results of a streaming-focused survey commissioned from Momentive to keep an eye on the trends seen in 4Q23 and into 1Q24.
Specifically related to the US market, Reese notes several takeaways from the survey: “1) total subscribers appears to have ticked marginally higher in the quarter, 2) the proportion of subscribers on the ad-supported tier appears to have ticked marginally higher in the quarter, 3) new and returning subscribers are more likely to opt for the ad-supported tier in Q1:24, and 4) Netflix continues to benefit from former account-sharers, at least 15% of whom opted to pay more for the extra-member feature post-crackdown, resulting in higher ARPU.”
Reese’s positive thesis for Netflix relied in part on the enforcement of measures against password sharing, which should result in an increase in both a) total subscribers and b) average revenue per user (ARPU). Recent results and the survey’s findings support that view for Q4. “We expect further growth in the coming quarters,” says Reese, “which should drive free cash flow expansion as Netflix keeps costs in check.”
In fact, looking at the overall picture, due to Reese’s belief Netflix can generate much more free cash flow than its guidance implies, Netflix keeps its place on Wedbush’s Best Ideas List.
Based on a potent combination of global content creation, balancing costs and increasing profitability, Reese makes the case the streaming giant has “reached the right formula.” Cash generation is set to get a further boost from the crackdown on password sharing and from its ad-supported tier.
And in a murky environment where competitors have yet to put together a coherent strategy, Reese sees Netflix as well-positioned to capitalize. As such, Reese believes Netflix should be valued as “an immensely profitable, slow-growth company.”
So, what does this all ultimately mean for investors? Reese maintained an Outperform (i.e., Buy) rating on Netflix shares, alongside a $525 price target, suggesting shares will climb ~8% higher in the year ahead.
Looking at the consensus breakdown, 23 other analysts join Reese in the bull camp and with an additional 11 Holds and 1 Sell, the stock claims a Moderate Buy consensus rating. However, the $471.93 average price target implies shares are slightly overvalued. (See Netflix stock forecast)
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