Netflix Q2 Earnings Preview: Analysts Expect Windfall From Password-Sharing Crackdown

Netflix’s move to start broadly monetizing password-sharing users — after years of tacitly allowing the practice with a wink and a nod — could help the streamer beat Q2 2023 earnings targets.

The company again kicks off tech and media sector’s second-quarter earnings season, scheduled to report Q2 earnings on Wednesday (July 19) after the market closes. A key question on investors minds will be how well Netflix is prepped to weather the double-whammy of SAG-AFTRA and WGA strikes. In April, before either of the strikes commenced, co-CEO Ted Sarandos told analysts, “We do have a pretty robust slate of releases to take us into a long time” in the event of labor walkouts.

But the more immediate focus for the Street is what the fruits of Netflix’s crackdown on illicit password-sharing will be. In May, Netflix began notifying customers in the U.S. and other countries that users on their accounts who live outside their households would need to be added as an “extra member” (or pay for their own subscriptions).

UBS analyst John Hodulik raised estimates on Netflix July 11 “following positive data on paid sharing,” he wrote in a note. “We continue to believe paid sharing will drive 5%+ uplift to revenue and see the roll-out as key to driving scale in advertising with the growth in the ad-tier mix and better targeting.”

“We see Netflix as the main beneficiary as peers prioritize profits in streaming,” according to Hodulik. The analyst increased his 12-month price target on the stock from $390 to to $525/share. He expects Netflix’s Q3 guidance to imply faster revenue and operating income growth “boosted by accretion from paid sharing.”

In June 2023, Netflix’s password-sharing crackdown resulted in more than 3.5 million gross sign-ups in the U.S. alone, per analytics firm Antenna — the largest single month of sub acquisition it has ever measured for the service (after recording 1.5 million monthly gross adds in just two previous instances: May 2023 and December 2022). Netflix cancelations were also up in June, while the ratio of gross additions to cancels for the service reached its highest level since early in the COVID lockdowns in April 2020, according to Antenna.

Overall, Wall Street analysts on average expect revenue of $8.29 billion (up 4% year over year) and earnings per share of $2.85 (down versus $3.20 in Q2 2022), according to Refinitiv. Analysts project Netflix netting 1.769 million new subscribers in the second quarter.

Wedbush Securities analysts analysts Alicia Reese and Michael Pachter also believe Netflix’s paid-sharing program could deliver “meaningful upside to our estimates” after observing what appears to be “solid uptake” of the offer, they wrote in a July 14 note.

The users under the “extra member” add-on option, which cost $8/month additional in the U.S., “are added at virtually no incremental cost” to Netflix, the Wedbush analysts noted. Similarly, they added, “we think Netflix’s 2023 guidance for $3.5 billion in free cash flow is conservative, particularly after printing over $2 billion of free cash flow in Q1 alone.” UBS’s Hodulik upped estimates for Netflix FCF this year to hit about $4.5 billion and reach $6.9 billion in 2024.

Per Deutsche Dank forecasts, Netflix’s paid-sharing plans will yield $900 million in revenue in 2023, more than tripling to $3.4 billion in 2024 and rising to $4.5 billion in 2025. In addition, the streamer’s ad business is expected to generate $400 million in 2023, increasing to $1.3 billion in 2024 and hitting $6 billion in 2030, according to the firm’s projections.

“We believe Netflix is one of the few clean earnings and FCF [free cash flow] growth stories in media and communications,” Deutsche Bank lead equity research analyst Bryan Kraft wrote in a July 17 research note. “All of the headwinds to traditional media are effectively tailwinds for Netflix.”

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