Netflix crackdown on password sharing emboldens stock bulls

In 2017, Netflix Inc. tweeted that “love is sharing a password”. In 2023, Wall Street loves that the company has changed its tune.

The video-streaming giant is cracking down on the ability of its users to share subscriptions across locations, a move that analysts say could push millions of borrowers to spring for their own plans. This strategy, along with the debut of a lower-cost tier with advertising, could keep user growth robust, supporting an extended rebound in the stock.

“There are millions of people on shared accounts, and if you get a few bucks per month out of even a small percentage of them, that creates a huge recurring revenue base that can supplement current growth,” said Jamie Lumley, senior analyst at Third Bridge, who sees the crackdown as a “huge opportunity” for the company.

Netflix shares already have more than doubled off a 2022 low and are up 18 per cent off a low hit last month. Despite these gains, the stock remains about 50 per cent below a peak from late 2021. The stock fell 1 per cent on Wednesday.

Analysts have been warming to the stock. The average estimate for Netflix’s 2023 earnings per shares has risen by 8.4 per cent over the past three months, according to data compiled by Bloomberg. Revenue is expected to increase 8.6 per cent this fiscal year before accelerating to almost 12 per cent growth in fiscal 2024. It rose 6.5 per cent last year.

Wells Fargo Securities sees the crackdown as a primary driver of this optimism, as the efforts “appear to be creating significant upside to estimates”. Despite the attention paid to the ad tier, analyst Steven Cahall wrote, “paid sharing is arguably the bigger near-term earnings opportunity.”

Bank of America Corp. expects subscriber results for the US and Canada “will be significantly stronger than current consensus”, citing an analysis of third-party data that it sees as “an encouraging sign that NFLX’s recent crackdown on password sharing is driving new subs to the service.”

Netflix has said that more than 100 million people are using the service without paying for it. The company reports first-quarter results April 18, and analysts expect it will add 2.3 million subscribers, according to data compiled by Bloomberg. That will bring total paid memberships to 233 million.

One potential pitfall is that the company alienates subscribers with its tougher stance. And given the strength of the recent stock rally, any sign that subscriber growth is disappointing could lead to a big drop in the shares.

“There’s some risk Netflix could be too restrictive, but we’re pretty optimistic that this won’t lead to a lot of people canceling,” said Third Bridge’s Lumley.

The company is restructuring its film group to make fewer movies each year, and this focus on costs, along with any subscriber tailwind from the password crackdown, could reinforce the idea that the stock is attractive at current levels.

In a measure of how Wall Street is viewing its prospects, Moody’s Investors Service last month upgraded Netflix’s senior unsecured notes to investment grade, up from junk status.

Shares trade at about 26 times estimated earnings, about a third of the stock’s average valuation over the past 10 years, though still a modest premium to the Nasdaq 100 Index.

To Brian Mulberry, client portfolio manager at Zacks Investment Management, that’s still attractive given Netflix’s growth potential.

“Netflix is generating revenue growth, while the film restructuring shows it is doing a good job of protecting its bottom line,” he said. “Meanwhile, even if the password move adds just 10-12 per cent growth to subscribers, that’s a measurable number. In an economy that is likely slowing, where else are you going to get that kind of growth?”