The future of Netflix lies in password sharing abuses

January 20, 2023

They are also very excited about the ads.

Netflix ended 2022 stronger than expected – but that’s not what investors and analysts are excited about today. This morning they’re looking at a future where the streaming leader hides in its own advertising layer and, perhaps more importantly, introduces a crackdown on password sharing in the US, Canada and other major markets.

On Thursday, Netflix announced that it will introduce what it more subtly calls “paid sharing” later this quarter. Based on trials in Latin America, the company expects some subscribers to initially cancel the service as a knee-jerk reaction, but an overall increase in revenue will soon follow. (That could wait until the second half of the year, Wells Fargo stock analysts warned in a note to clients Friday.)

Netflix maintains that more than 100 million households currently share the account and are therefore not adequately monetized in Netflix’s opinion. Wall Street is drooling over the glut of freebies — and Netflix’s imminent plans to fix the problem.

“We are most excited about the company’s plans for password sharing,” analysts at investment firm Wedbush wrote in a note Friday morning.

The following scenario was described: Let’s say adding an outside family member to an existing plan costs an additional $5 per month, the high point of Wedbush’s own hypothetical. If 10 percent of subscribers opted in, according to another assumption, “Netflix would generate $1.4 billion in additional revenue with virtually no marginal cost,” they wrote. This is practically pure profit.

Considering that Netflix posted surprisingly strong fourth-quarter operating income on Thursday, but reported its lowest net income since 2016, that’s a very, very good thing.

“Guillermo del Toro’s Pinocchio”

Netflix

Still, Wedbush’s “key takeaway” from the fourth quarter was that Netflix’s “Basic with Ads” plan “resulted in subscriber retention,” the analysts wrote. “While management claimed that few subscribers switched from the ad-free product to the new ad-supported tier, we suspect that the lower-priced option brought back subscribers who had previously churned.”

NFLX is currently trading at $335 per share, up about 6% from last year’s earnings. Wedbush raised their target price on NFLX stock to $410 from $400. Late yesterday, investment banking advisory firm Evercore ISI raised its price target on NFLX to $400 (from $340), which also happens to be Wells Fargo’s (maintained) price.

Not everyone is this bullish. While Moffett Nathanson raised his price target by $10, it only extends to $250. Analysts at Evercore ISI believe Netflix stock could double that — or more — by 2025. North of $500, NFLX prices have not been sniffed at since the beginning, which will be shockingly turbulent in the first quarter of 2022.

So what about the Moffett Nathanson naysayers? They see the impending crackdown on password sharing as a “challenge” and note that it’s “difficult” to predict how it will play out.

“If we have a problem with the stock, it’s that it ran too far and too fast, given the fundamentals of our model, the risks inherent in the outcome and the risks relative to other investment decisions,” they wrote, downgrading earlier forecasts. First quarter subscriber growth and revenue.

Three out of four isn’t bad.

Catherine Zeta-Jones as Morticia Adams in episode 105 of the hit Netflix series Wednesday.

VLAD CIOPLEA/NETFLIX

Netflix’s new co-CEO Greg Peters talked Thursday about what he generously calls “borrowers” with “motivations” that don’t have their own paid memberships.

“Some of it is economically driven, so we’re trying to make sure we respond to that and find the right price, whether it’s an individual account or a non-member benefit,” VP Reed Hastings said on the first day of his new gig alongside co-CEO Ted Sarandos. “Obviously, ad-supported plans give us an opportunity to show a lower consumer price in the countries where we advertise.”

The other piece is “casual sharing only,” Peters continued, “where people can pay but don’t need to, so they borrow someone’s account.” Our job is to give them a little push and create features that make it easy and simple for them to switch to their own account.”

The former Netflix chief operating officer and chief product officer knows that cracking down on password sharing “isn’t going to be a universally popular move.” to say the least.

“Our job is to continue to add value so that we have more amazing titles that people can’t wait to see, whether that’s going to satisfy members who are switching over or essentially getting back those who are turning off the service , and bring them back. the coming months and years,” he said.

Wilson Chapman contributed reporting.

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