Netflix Inc (NASDAQ:NFLX)’s addition of an ad-supported subscription tier in November last year has attracted praise from Wedbush Securities analysts who expect this to drive a re-acceleration of subscriber growth.
The streaming giant reported its 4Q 2022 earnings after the bell on Thursday, which was a mixed bag with revenue on par with the consensus analysts' expectation while subscriber growth surprised on the upside and earnings per share missed on an unrealized loss on a euro non-denominated debt due to the depreciation of the US dollar against the euro during 4Q.
In a note to clients, Wedbush analysts wrote that Netflix's new ad-supported tier should continue to reduce churn and draw new subscribers to the service, as seen in 4Q with the addition of 7.7 million subscriptions.
READ: Netflix CEO Reed Hastings steps down as streaming giant reports mixed fourth quarter results
They wrote this should contribute increasingly to free cash flow generation as Netflix continues to improve its content quality and lower overall spend per subscriber.
“While management stated that few subscribers traded down from the ad-free product to the new ad-supported tier, we suspect that the lower-priced option brought back subscribers who had churned in the past,” they wrote.
“We expect this phenomenon to repeat itself in the coming year, with the result that we expect Netflix to return to subscriber growth of 17 million new users per year.”
They also noted the company’s ability to drive profitability higher as it cracks down on password sharing later this quarter.
“We think Netflix is well-positioned in this murky environment as streamers are shifting strategy, and should be valued as an immensely profitable, slow-growth company,” Wedbush’s analysts wrote.
The analysts reiterated their ‘Outperform’ rating on the stock and raised their 12-month price target from US$400 to US$410.
Netflix shares had added 6% in pre-market trading on Friday at about US$334.80.
Can Netflix’s share price rebound last?
The last few months have been positive for Netflix’s share price, which has surged more than 75% since hitting a five-year low in May of 2022, noted CMC Markets UK chief market analyst Michael Hewson.
“The question that was being asked given the solid rebound in the share price in the last few months was whether Netflix would be able to deliver the goods, and last night’s results answered that question emphatically with a resounding yes, certainly as far as subscribers were concerned, helped by content like the Knives Out film, Glass Onion, and the surprise Addams Family spin-off, Wednesday,” he noted.
“Having finished the day lower yesterday, last night’s results saw the share price rebound strongly in after-hours trading, with the big test whether it can sustain that move when US trading reopens later today.”
Hewson also highlighted that Netflix’s 4Q results had addressed skepticism that the addition of an ad tier might cannibalize their existing user base as the streaming market becomes ever more competitive.
“With such a big increase in subscriber numbers it's perhaps surprising that revenues weren’t higher, which suggests that perhaps there was some cannibalization because of the roll-out of the new ad tier service,” he said.
Swissquote Bank senior analyst Ipek Ozkardeskaya noted the success of Netflix’s subscriber growth on the popularity of new shows such as Harry & Meghan and said the results had brought relief to the company which was trading more than 3% down at the close on Thursday.
“We will likely see the recovery extend to $350 per share, the levels it was trading before the second big slump last year, in April, but the levels prior to last January slump, around $500 per share seem like a faraway dream,” Ozkardeskaya said.
Contact the author at emily.jarvie@proactiveinvestors.com
Follow her on Twitter @emilyjjarvie