Netflix Q1 "may be confusing," analyst cautions Netflix (NFLX) is scheduled to report its first quarter 2023 results and business outlook on Tuesday, April 18. A video interview with Netflix executives, including co-CEOs Ted Sarandos and Greg Peters, will follow at 6:00 pm ET. What to watch:
1. SUBSCRIBERS: Netflix's membership trends are a closely-watched measure of the company's growth trajectory. In the fourth quarter, the company reported global streaming paid net additions of 7.66M and reported that it finished 2022 with 230.8M paid memberships.
For Q1, Netflix has forecast "modest positive paid net adds," explaining in its last quarterly letter to investors that its expectation of fewer paid net adds in Q1 than in Q4 "is consistent with normal seasonality and factors in our strong member growth in Q4'22, which likely pulled forward some growth from Q1'23." The also said it expected to roll out paid sharing "more broadly later in Q1" and anticipates "that this will result in a very different quarterly paid net adds pattern in 2023, with paid net adds likely to be greater in Q2'23 than in Q1'23."
On the day after the company's last earnings report, Citi noted that Netflix's net adds in Q4 came in ahead of Visible Alpha consensus, the company's guidance and buy side expectations. Netflix's FY23 operating margin target of 18% to 20% also exceeded consensus at 18%, said the firm, which also highlighted the news that Ted Sarandos and Greg Peters will take over as co-CEOs as Reed Hastings moves into the role of Executive Chairman.
More recently, Citi kept a Buy rating on Netflix with a $400 price target into the company's Q1 results on April 18. Relative to most quarters, Netflix's Q1 "may be confusing" given a nascent advertising tier, slower rollout of password sharing enforcement, and questions around its "sharply lower prices" in 100 smaller, lower penetration markets, the analyst tells investors. However, Citi encourages investors to not overact to the Q1 report and to keep their "eye on the prize." It continues to believe the crackdown on password sharing won't result in incremental revenue and that the ad tier will add 65M subscribers with average revenue per user above video on demand levels.
Consensus forecasts recently called for $8.18B in revenue and $2.86 in earnings per share for the March-end quarter, versus the company's forecast for Q1 revenue of $8.17B and EPS of $2.82.
2. UPDATE ON SHARING: On February 8, in an "update on sharing," Netflix said in part: "Today, over 100 million households are sharing accounts - impacting our ability to invest in great new TV and films. So over the last year, we've been exploring different approaches to address this issue in Latin America, and we're now ready to roll them out more broadly in the coming months, starting today in Canada, New Zealand, Portugal and Spain... Members on our Standard or Premium plan in many countries (including Canada, New Zealand, Portugal and Spain) can add an extra member sub account for up to two people they don't live with - each with a profile, personalized recommendations, login and password - for an extra CAD$7.99 a month per person in Canada, NZD$7.99 in New Zealand, Euro 3.99 in Portugal, and Euro 5.99 in Spain."
3. "MAX" COMPETITION: On April 12, Warner Bros. Discovery (WBD) introduced "Max," which will launch in the U.S. on May 23. "Max will stand out amongst streamers by uniquely combining unrivaled breadth and superior quality with iconic franchises and strong product experience, all for great value," the company stated. Max will offer three pricing options: Max Ad-Lite for $9.99/month or $99.99/year; Max Ad Free for $15.99/month or $149.99/year; and Max Ultimate Ad Free for $19.99/month or $199.99/year. Existing HBO Max subscribers will have access to Max at the same price as their HBO Max subscription and HBO Max subscribers "will still have access to their current plan features for a minimum of six months following launch," the company stated.
Subsequently, on April 14, Wells Fargo noted that Warner Bros. Discovery shares had declined 11% in the three sessions since the company's "Max" streaming service launch event, versus the media group being down 3% and the S&P 500 being flat in the same period, which the firm attributed to "churn anxieties" as a subset of HBO Max subscribers will need to download the new app. However, the firm views the Max sentiment as "an overreaction" with its long-term thesis of deleveraging still intact. The firm, which revised its Q1 DTC net adds forecast down to 1M from 2M previously, reiterated an Overweight rating and $20 price target on Warner Bros. Discovery shares ahead of the company's upcoming Q1 report.
4. "MIXED" SETUP, RISK TO ESTIMATES: In a preview published last week, JPMorgan said the firm remains positive on Netflix shares heading into the Q1 earnings report, but believes there is near-term risk to Q2 estimates as paid sharing likely rolls out more broadly during the quarter. Just as there was initial subscriber pushback and "bumpiness" in recently launched markets such as Canada, similar friction should be expected across a larger set of markets, likely to include the U.S., Brazil, those in Western Europe, and many others, the analyst tells investors. As a result, the firm expects Netflix to walk back its expectation for greater paid net adds in Q2 than Q1 as the bulk of the paid sharing rollout will likely now come in Q2, a seasonally weak quarter with fewer gross additions "at the top of the funnel." It raised its Q1 net adds estimate from 1.5M to 3.25M and lowered its Q2 net adds outlook from 3.25M to 1.0M. JPMorgan keeps an Overweight rating on the shares with a $390 price target.
In its own preview note, Piper Sandler said it views the stock setup as "mixed" into Netflix's Q1 report. The U.S. series "Wednesday" was a big success in Q4, but there were fewer hits in Q1 and Piper's Netflix Navigator points to a weaker net adds result for Q1, the analyst tells investors. While the company's advertising tier looks promising, advertiser demand may outstrip ad-tier users, says Piper. It keeps a Neutral rating on the shares with a $325 price target.
