Netflix’s latest earnings are convincing analysts that the streaming company can make more money from its members. A crackdown on password sharing is paying off already but the advertising business could offer additional opportunities.
Netflix
(ticker: NFLX) took the chance with its third-quarter earnings to announce more price increases and it was music to Wall Street’s ears.
Netflix shares were up 16% at $401 in early trading, the best performer in the S&P 500 on Thursday and on track for their best day since January 2021, according to Dow Jones Market Data.
Walt Disney
(DIS) stock fell 0.6% and
Paramount Global
(PARA) dropped 0.8%.
KeyBanc analyst Justin Patterson wrote in a note that he believes Netflix is a rare asset that can offer investors growth across a range of economic environments.
Netflix’s quarterly addition of 8.8 million subscribers shows its efforts to make users pay for sharing their accounts are working, while its operating profit is rising and share buybacks should support earnings growth, according to Patterson.
Patterson raised his rating on Netflix to Overweight from Standard Weight. He introduced a target price of $510, based on a price-to-earnings multiple of 25 times Netflix’s forecast 2024 earnings.
Monthly rates on two of the company’s U.S. plans are going up by 15% to 20% and it is also raising prices in the U.K. and France.
“We’ve been cautious recently on a very near-term price hike on the heels of Paid Sharing, but we think the price increase… in the U.S., U.K., & France is being implemented quite strategically,” J.P. Morgan analyst Doug Anmuth wrote.
While ‘paid sharing’ looks to be paying off, Netflix’s other profit-boosting initiative is the introduction of advertising for its cheaper subscription plans, which has been followed by its rivals. The growth of the ad-supported tier could help drive the stock higher, analysts think.
Netflix froze the price of its U.S. ad-supported tier, where it looks to be prioritizing building its user base.
Anmuth said the increase in the basic tier pricing would likely push more subscribers into the advertising-supported tier, while the premium tier increase will likely be swallowed by wealthier subscribers. He raised his target price on Netflix stock to $480 from $455 and kept an Overweight rating.
Seaport Research analyst David Joyce estimated there could be around 6.5 million subscribers to the ad-supported tier, meaning advertising could be generating as much as $70 million-$90 million a quarter in revenue for Netflix.
Joyce kept a Buy rating and $482 target price on Netflix.
“We continue to believe price increases combined with scaling ad rev will drive average revenue per member growth in ’24,” UBS analyst John Hodulik wrote. He kept a Buy rating and $500 target price on the stock, saying it will be the “prime beneficiary” of more rational competition in streaming.
Even bears on the stock looked to be impressed. Macquarie analyst Tim Nollen kept a Neutral rating on Netflix but said the company had delivered a solid quarter and was showing gradual improvement.
“We are optimistic on the upside potential to subs, revenue and earnings from paid sharing efforts and its ad tier, but are conscious of the time it will take for these to contribute,” Nollen wrote. He kept a $410 target price on the stock.
Write to Adam Clark at [email protected]
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