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The Ratings Game: Netflix stock rockets toward best day in 21 months as company details plan to end password sharing

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A big jump in subscribers sent shares of Netflix soaring toward their best day in about 21 months Wednesday, even as the company’s outlook and plans to tap into new revenue sources were dividing analysts.

Netflix
NFLX,
+13.54%

shares were up more than 15% in morning action action and were on pace to log their largest single-day percentage gain since Jan. 20, 2021, when they rose 16.9%, according to Dow Jones Market Data. The latest rally comes the morning after executives told investors that the company ended the third quarter with an additional 2.4 million members, bringing its total subscriber count up to 223 million.

After two quarters of net declines, Netflix’s positive subscriber momentum in the third quarter seemed to sit well with Wall Street, as did the company’s talk of new initiatives, including a plan to crack down on password sharing starting early next year. Under the plan, the company will allow those who are currently using someone else’s password to migrate to their own accounts and will also let account holders pay extra to create subaccounts for family members or friends.

See also: Netflix will crack down on password sharing next year — here’s how it will work

“We believe we now have visibility into a subscriber growth inflection point next year given that Netflix management has confirmed both the early 2023 introduction of its new measures designed to better monetize account sharing, and the early November timing of its AVOD [advertising] tier launch in 12 top markets,” wrote newly bullish analysts at Deutsche Bank, led by Bryan Keane.

As they upgraded Netflix shares to buy from hold, they wrote positively of the company’s potential to cash in on the many users who are currently sharing accounts. “The 100M ‘account borrowers’ Netflix has counted represent a clear and present growth opportunity that Netflix will soon be in a position to exploit,” they wrote. The Deutsche Bank team raised their price target on the stock to $350 from $270.

Analysts at JPMorgan also struck an upbeat tone as Netflix readies for the new monetization initiatives. In addition to plotting its password-sharing crackdown, the company intends to roll out a streaming plan with ads next month in markets including the U.S., Germany and Japan that will cost around $6.99 a month.

“Coming out of [third-quarter] earnings, we have increased conviction in Netflix’s ability to accelerate revenue growth with the help of advertising and monetization of account sharing, expand operating margins, and increase free cash flow,” wrote the team of analysts led by Doug Anmuth, which upgraded Netflix shares to overweight from neutral and lifted their price target to $300 from $240.

Netflix executives also see a new chapter ahead, saying in a shareholder letter that, going into next year, advertising and paid sharing initiatives will add new revenue streams to the point where “membership is just one component of our revenue growth.”

The Evercore ISI team, led by Mark Mahaney, seemed to buy into that long-term vision. “We continue to view the subscription [and] advertising-supported video-on-demand offering as a driver of new subs, a churn reducer and potentially significant revenue driver longer term,” they said.

Separately, Evercore noted that foreign-currency headwinds from Netflix’s international exposure “came in worse than we anticipated,” but Evercore maintained its outperform rating on Netflix shares.

Mixed outlook

Other analysts saw a more mixed picture ahead.

Michael Hewson, chief market analyst at CMC Markets U.K., said the fourth-quarter outlook was on the “weak side,” making the premarket share-price increase “somewhat perplexing.” The company anticipates that 4.5 million new subscribers will join in the fourth quarter, while revenue could grow to $7.78 billion from $7.71 billion a year ago, as operating margins fall nearly in half to 4.2%.

“Netflix appears to be blaming the strength of the U.S. dollar for the headwinds with respect to its Q4 numbers. From the tone of the shareholder letter, it’s clear that Netflix doesn’t expect a material contribution from the new ad tier in Q4,” he said in a note.

Gregory Peters, Netflix’s chief operating and product officer, was bullish on the ad-supported plan and said that the company doesn’t expect to see much plan switching among existing subscribers.

“The fact that we think that this lower consumer-facing price will bring in a lot more members, then we’re quite confident in the long term that this will lead to a significant incremental revenue and profit stream,” he told analysts.

The new efforts come with puts and takes, noted MoffettNathanson’s Michael Nathanson, even though he thinks they “make sense” in theory.

Among questions investors need to consider, he said, is whether families already on expensive plans will “hate churn” or will move to less costly plans if asked to pay a surcharge in order to allow their college-aged kids to watch Netflix from their dorm room. He also wonders how quickly the ad business will be able to offset the revenue impact of existing subscribers opting to pay less for the ad-supported tier.

“Given the massive bounce in NFLX’s share price, the market has clearly voted and once again proves the adage that the best growth stock needs two things to work: a story and investors that believe the story,” Nathanson said.

He’s more cautious, noting that at the very least, currency presents an impediment to Netflix’s ability to hit Wall Street’s earnings targets, which he thinks are “overestimated.” Nathanson has a market-perform rating on Netflix shares but upped his price target to $230 from $220.

Other analysts expressed uncertainty over how fast the new ad-supported plan could bring in subscribers and revenue.

Andrew Marok, an analyst at Raymond James, stuck to his market-perform rating but added that his team remains “cautious on the pace of uptake and the company’s ability to maintain premium ad pricing with little targeting and measurement capability.

“Our current estimates figure in modest upside from account sharing,” he added, “as we believe these users tend to be more marginal and in many cases do not find enough value in Netflix to pay for the service themselves, but see this as an area of potential upside to our outlook.”

KeyBanc Capital Markets analysts led by Justin Patterson cautioned that the investment risk in Netflix could include “mis-execution” around its monetization measures. Ad revenue could roll in more slowly than expected, and the password crackdown might not be as effective as hoped.

Patterson kept his sector-weight rating but lowered 2023 and 2024 revenue forecasts by around 2% each.

As Netflix itself undergoes changes, it will also switch up the way it presents some information to investors. With the ad tier upcoming, Netflix plans to stop offering subscriber guidance while it instead focuses on giving revenue projections.

“We applaud this on the one hand, to get past investor fixations over sub #s and focus on the real P&L, but on the other it will make it harder to assess how successful the ad tier is in terms of these users — and to compare with other streaming service competitors,” wrote Macquarie analyst Tim Nollen, who has a neutral rating on the shares.

Opinion: Netflix stock could be even more volatile around future earnings, thanks to this change

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said the ad initiative is a sign that Netflix’s “competitive edge is becoming dulled.”

“Rivals are closing the gap on content quality. The payment reductions offered for the ad-supported version [of Netflix] arguably don’t represent good market value either when compared to rival offerings, especially the Disney+ and Hulu bundle,” she said in a note.

Walt Disney
DIS,
+1.18%

— the operator of both Disney+ and Hulu — was enjoying a Wednesday morning stock bump of over 2%.

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