Netflix shares edged lower in early Thursday trading, trimming some of the stock's $53 billion year-to-date advance, as investors looked to the streaming giant's first-quarter earnings update after the closing bell.
Netflix (NFLX) underwent a massive crackdown on password sharing last year while pivoting toward an ad-driven model that had been long resisted by its founder and former CEO Reed Hastings, but has emerged as the clear winner in the global streaming wars with a base of more than 260 million subscribers.
"Netflix has lapped the competition, and everyone is still playing for a far distant second," said KeyBanc Capital Markets analyst Brandon Nispel in a recent study of the direct-to-consumer streaming sector. "Engagement is what matters, and even as we bundle services together, no one is likely to get close."
The group has also managed to produce new hit content, including programs such as "Avatar: The Last Airbender," "Fool Me Once" and "The Gentlemen," while paring back content spending as it focuses on profit and margins over winning new subscribers.
The latter tactic, in fact, has become far more difficult in U.S. markets, with the pace of streaming growth last year falling more than 50% from 2022 and with consumers pulling back post-pandemic entertainment spending.
Netflix's U.S. market share is also falling notably. It was last pegged by research group Antenna at around 25% at the end of last year, down from the near 50% levels it commanded during the Covid era.
Netflix: Profit over growth
That's compelled Netflix's profit and margin focus, as well as its overseas-growth strategy, as it looks to solidify its overall position while ensuring lower subscriber churn rates.
"Other studios and streamers have survival imperatives to improve their streaming execution, although we still expect Netflix to remain the leaders versus content-rich traditional media companies (Disney+, Max, Paramount) as well as Apple TV, Amazon, etc.," said Benchmark analyst Matthew Harrigan.
Subscriber-growth rates are still key, however, both in terms of the group's new ad-supported platform, priced at $6.99 a month at the lowest tier, as well as its ad-free plan, where pricing has jumped from the $11.99 per month teaser to $15.49 per month.
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The increases probably didn't blunt subscriber growth over the first quarter, with analysts expecting a headline gain of around 5.1 million – almost three times the year-earlier 1.75 million tally – but could have a longer-term impact over the coming year.
That impact, though, could prove to be a net positive for Netflix, as rivals facing increased cancellations among their own subscriber bases turn to licensing content to the market leader to offset lost revenue.
Streaming war winner?
"While this is a profitable revenue stream for legacy media companies, this is also something that benefits Netflix viewership and supports both price increases and ad revenue," said KeyBanc's Nispel. "With paid-sharing going well and advertising beginning to ramp, Netflix strikes us as well positioned into the next year."
BMO Capital Markets analyst Brain Pitz, who lifted his Netflix price target by $75 to $713 per share earlier this week, also sees the group benefiting from an $8 billion shift in spending that will migrate from linear U.S. TV to streaming platforms over the next three years.
Netflix, Pitz argues, could capture around a third of that tally, and nearly a quarter of the anticipated $20 billion globally and sees Netflix hoarding some 54 million ad-tier subscribers by the end of next year.
For the three months ended in March, analysts expect Netflix to post a bottom line of $4.52 per share, a 57% increase from the year-earlier period, on revenue of $9.28 billion.
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That's likely to mean a 3.5 percentagepoint widening in gross margins, which are forecast at 44.6%, as well as a keen focus on the group's $17 billion content spending plans for the rest of the year.
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"We expect another solid result in 1Q as Netflix highlights their ability to grow even while taking material price increases," said Pivotal Research analyst Jeff Wlodarczak, who carries a buy rating and last week lifted his price target by $65 to a Wall Street-high $765 on the stock.
"Netflix continues to be a strong absolute and relative value to its video entertainment peers for consumers, which combined with a strong content slate, the positive effects of ad-supported and its competition pulling back on content availability sets Netflix to continue to generate solid subscriber growth," he added.
KeyBanc's Nispel currently rates Netflix at 'overweight' with a $725 target. Benchmark's Harrigan rates it a sell with a $440 price target.
Netflix shares were marked 0.85% lower in early Thursday trading change hands at $608.60 each, a move would still leave the stock with a year-to-date gain to around 30%.
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