Over the last 18 months, Wall Street has focused on streaming becoming broadly profitable. That shift, along with Hollywood strikes that reduced content output, have forced a re-evaluation of legacy media players’ streaming aspirations.
It has become increasingly clear that Netflix is winning the streaming wars — and is not likely to be caught anytime soon.
Amid the changing market dynamics, Netflix will release its fourth quarter earnings for 2023 on Tuesday after the market close, the first of the major entertainment companies to report this year.
The reduction of content spend and output, and an increase in third-party licensing, have been a “a tacit acknowledgement that not all media companies will be able to achieve Netflix’s global reach and scale in streaming,” Bank of America analyst Jessica Reif Ehrlich wrote in a note to clients last week.
As Netflix closes the books on 2023, Wall Street will be looking to the streamer’s executives to lay out its growth story for 2024, which is a “complex balance between price, sub growth and margins” that involves “trade-offs that the company did not have to worry about in the past,” Barclays Capital analyst Kannan Venkateshwar wrote in a Jan. 17 note to clients.
Analysts surveyed by Zacks Investment Research expect Netflix to report earnings of $2.20 per share on revenue of $8.72 billion for its fourth quarter of 2023, compared to 12 cents per share on revenue of $7.85 billion a year ago. Shares of Netflix closed at $482.95 per share at the end of Friday’s trading session, up 12% over the past six months and 35% in the past year.
Here are key questions Wall Street will be looking for answers to when Netflix unveils its results.
1. When will the ad tier make money?
Earlier this month, Netflix advertising president Amy Reinhard revealed that the ad tier has now surpassed 23 million monthly active users, well above the 5 million announced at last year’s upfront presentation in May.
In 2023, the ad tier was not material to Netflix’s bottom line. But this year investors want to see the inflection point where it starts to contribute in a meaningful way to earnings, Wedbush Securities analyst Alicia Reese told TheWrap.
Viewers opting for the advertising tier has pushed down the average revenue per member, Reese explained. That should change likely early in 2024 as even more viewers use the tier, membership continues to grow and the cost-per-1,000 ad impressions stabilizes or rises, she said.
Netflix’s ad-supported growth should allow revenue growth in the low-teens over the medium term, Keybanc analyst Justin Patterson wrote in a Jan. 16 note to clients.
The company’s main priority is to scale the ad-tier offering. But Piper Sandler analyst Matt Farrell questioned in a Jan. 17 note to clients when the ad tier would pivot from the crawling phase to the walking phase, “especially as the competitive landscape continues to evolve.” On Jan. 29, Prime Video will launch its own ad tier, which is expected to be a drag on Netflix’s offering.
For revenue growth to remain in double-digits, Netflix will need to scale its advertising faster than it has so far, “but this process is likely to take time,” Venkateshwar said. He said that ad-supported subscriber growth has been trending “significantly below the company’s own expectations.”
Netflix, which charges $6.99 per month for its ad tier and reported average revenue-per-paid member of $16.29 in the U.S. and Canada during the third quarter, would need to charge at least $9.31 or higher for the offering to add to its net earnings, according to Reese. Netflix has said it would deliver four to five ads per hour and Webush believes its CPMs are in the $40 to $45 range and will rise in 2024.
The average Netflix user watches 65 hours per month, Reese said citing the company’s public viewership data. But she noted monthly viewing for the ad tier is likely lower than the average and can vary based on content quality. She believes the tier could reach 55 hours per month, with CPMs at $45 or higher in 2024 and potentially 50 hours per month and CPMs of $50 or higher by the end of the year with “superior targeting.”
2. How long will the subscriber benefit from the password-sharing crackdown last?
Wall Street will also want to know how much longer Netflix’s password-sharing crackdown on 100 million households globally, including 30 million in the U.S. and Canada, will continue to yield more subscribers.
Erlich says that there is “still runway” for the crackdown in the near term, which could accelerate the growth of NFLX’s ad-supported tier, she said.
But most investors see the benefits of the crackdown ending after the second quarter. Wells Fargo analyst Steve Cahall expects paid sharing to be a “diminishing benefit” in the first half of 2024 as it continues to rollout across Netflix’s subscriber base. The bank expects Netflix to add 9.5 million to 10.4 million net subscribers in the fourth quarter.
Though he expects Netflix’s average revenue per user to be flat in the fourth quarter given limited price increases, UBS analyst John Hodulik predicts growth will accelerate throughout 2024 as ad-tier revenues from paid sharing adds to earnings and the streamer raises prices.
“The scaling of Netflix’s ad business is taking time, but we still believe in the long-term opportunity with Netflix driving [about] 8% of U.S. TV viewership,” the analyst wrote in a Jan. 17 note.
3. How will the uptick in third party licensing impact content strategy and spend?
During its third quarter earnings in October, Netflix said it would spend up to $17 billion on content in 2024, compared to $13 billion in 2023 when opportunities to spend were limited by the Writers’ Guild of America and SAG-AFTRA strikes.
Erlich says the availability for Netflix to purchase more third-party content is a “win-win” for both the company and industry. She noted that the move will drive efficiencies in Netflix’s content spend because it “no longer needs to finance as much higher-risk new production” and can instead supplement more concentrated “bets” with well-known, better-established content from other streamers. Third-party content has dominated the streamer’s recent top 10 list.
Farrell said he will be listening closely to management’s remarks on whether “leveraging more licensed content alters the original content strategy, even if it is slightly,” as well as for any change in its plans for ramping back up content and marketing spend.
It will be “telling to see how the percentage of hours viewed on licensed content grows over time” and if Netflix can grow its global exposure on licensed content, Reese and Webush’s Michael Pachter said in a Dec. 21 note to clients.
4. What’s next for free cash flow?
Netflix has forecasted that free cash flow for fiscal year 2023 will be approximately $6.5 billion, up from previous guidance of at least $5 billion. The figure includes roughly $1 billion in lower-than-planned cash content spend from the strikes.
Investors will be looking to see if the streamer can maintain or generate even more cash, with factors like licensed programing, ad-tier investments and lingering impacts from the strike key to that potential.
“Netflix has reached the right formula with global content creation, balancing costs and increasing profitability, while its password sharing crackdown and eventually its ad-supported tier should further boost cash generation,” Reese and Pachter wrote. The company “is well-positioned in this murky environment as competitors have yet to settle on a coherent strategy.”
5. What’s next for Netflix stock buybacks and M&A?
Citigroup analyst Jason Bazinet, who downgraded Netflix stock from buy to neutral rating on Jan. 8, warned that Wall Street has “lofty” expectations for the streamer over the next two years and cited risks of lower revenue and higher cash content costs in 2024 and 2025.
He pointed out that Netflix saw revenue growth in the low-to-mid teens between the fourth quarter of 2022 and the third quarter of 2023, with Wall Street consensus calling for similar growth through the third quarter of 2024. But, in the fourth quarter of 2024, investors expect the two-year stacked growth rate to expand to 25%.
“We think this is unlikely and expect 2024 Street revenue estimates to moderate,” he said.
Citigroup also forecasts that Netflix’s cash content spend for 2025 will be close to $20.4 billion — compared to analysts estimates of roughly $18 billion — factoring in changes in revenue, COVID and the Hollywood strikes.
“It’s clear that both the COVID pandemic and the Hollywood strikes put incremental pressure on content spending. That makes sense,” Bazinet said. “But the Street expects cash content costs to barely increase from the strike-induced lows of 2023 (and remain below COVID pandemic levels) when expressed as a share of revenues.”
Given Netflix’s guidance that it plans to generate “substantial” positive free cash flow in 2024, Citigroup expects capital allocation to be a key area of focus during the earnings call.
“While Netflix has continued its buyback activity throughout 2023, we will be listening for any incremental commentary on the pace of buybacks and the firm’s M&A appetite during 2024,” Bazinet said in a separate note last week.
During the third quarter, Netflix disclosed that it repurchased $4.1 billion in stock under a $5 billion repurchase program authorized by its board. In September, it added $10 billion to the program on top of the $1 billion remaining. Wall Street expects Netflix to buy between $4 billion and $4.5 billion in stock in 2024 and 2025, Bazinet said.
If Wall Street estimates are accurate and if Netflix does not buy back significant stock over the next two years, Netflix could have “more than $8 billion of net cash on the balance sheet by 2025, giving the firm ample capacity to pursue M&A,” he estimated in the Jan. 8 note.
“We believe the most likely target is a video game publisher with a robust portfolio of IP,” he added.
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