Netflix's unpredictable finale: With no more subscription guidance, the focus is on financial estimates

8:48 am ET January 13, 2023 (MarketWatch) Print

By Jon Swartz

The steaming service, which reports fiscal fourth-quarter results on Jan. 19, is ditching guidance on net subscriber additions and instead focusing on financial numbers

Netflix Inc.'s biggest cliffhanger isn't a season-ending episode of "Stranger Things" or "Money Heist," but something much closer to home: its financial metrics.

The streaming service, which reports fiscal fourth-quarter results on Jan. 19, is ditching guidance on net subscriber additions and instead focusing on financial numbers such as revenue, earnings and operating margin as the tumultuous industry emphasizes profitability over subscription growth.

Netflix (NFLX) has reversed course in offering forecasts of net subscriber adds -- which have proved to be the one factor with the greatest influence on stock movement in recent years -- after missing estimates repeatedly in the past year and seeing its shares battered. The company has also pulled an about-face and initiated a lower-cost, ad-supported plan to pump up sales.

The changes induced analysts such as Jefferies' Andrew Uerkwitz to take a sunnier position on a stock that lost half its market value in 2022. He upgraded Netflix shares to buy in a note Thursday on the prospect of advertising-based video on demand, or AVOD, coupled with changes to password sharing, to "drive top line outperformance" in fiscal 2024. Uerkwitz predicts $40.4 billion in 2024 sales, 7% over Wall Street estimates, and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $10.9 billion, versus Wall Street estimates of $8.6 billion.

He added that Netflix and Walt Disney Co.'s (DIS) Disney+ are likely to capture most of incremental connected TV ad spending despite a generally agreed-upon view that digital ads will taper off in 2023.

Read more: TikTok emerges as biggest winner as digital advertising faces its worst patch in a decade

In its annual poll of 50 major ad buyers, market researcher Cowen found that 41% expect their largest clients to advertise on Netflix, a testament to the upside of its recent pivot to the ad-supported plan and an adjacent partnership with Microsoft Corp. (MSFT). Netflix shares have spiked 36% since it announced fiscal third-quarter results on Oct. 18.

"We view [Netflix] as the best recession play in our coverage universe if macro conditions worsen," Cowen analyst John Blackledge said in a note Wednesday, maintaining a price target of $405 for Netflix, or 24% above its closing price of $327.26on Wednesday.

Indeed, increased demand among businesses for more customer data has played to Netflix's ad plan, which contributed directly to 13% of its total subscribers in December, according to Jon Christian, executive vice president of media-technology consultant Qvest.

"Netflix is so data driven and into demographics, it raises the value on the ad side," Christian said. "We've gone from adding subscribers at all costs to a point where the market values on profitability and costs."

In a note Wednesday, Evercore ISI analyst Mark Mahaney wrote that he considers Netflix, Uber Technologies Inc. (UBER) and Booking Holdings Inc. (BKNG) among the best ideas for "New Money Longs" this year.

Not everyone, however, is bullish on Netflix, at least for the fourth quarter. Barclays analyst Kannan Venkateshwar cautioned that Netflix is "on a path" to add 2.7 million subscribers -- significantly less than the 4.5 million the company has projected. A drop in app downloads, compounded by a plunge in viewership from last year's record audiences for "Squid Game," account for the subscriber shortfall, he said.

Read more: Netflix could be in for a very rough quarter, analyst warns

Analysts polled by FactSet are expecting Netflix to report $7.84 billion in revenue and adjusted earnings of 60 cents a share in the fourth quarter. In the same quarter a year ago, the company reported $7.71 billion in revenue and earnings of $607 million, or $1.33 a share.

Netflix shares have climbed 12% so far this year, while the S&P 500 is up 4% in the same period.

-Jon Swartz

(END) Dow Jones Newswires

January 13, 2023 08:48 ET (13:48 GMT)