Netflix Inc (NASDAQ:NFLX) introduced paid sharing more broadly in 2Q, a move that UBS is expecting to pay off in a big way in the coming quarters.
As a result, analysts at the investment firm have upped their price target on the entertainment giant’s stock to 'Buy' and increased its price target to $525 from $390.
“We see Netflix as the main beneficiary as peers prioritize profits in streaming,” analysts wrote.
According to UBS, various indicators such as engagement, downloads, and search interest suggest positive outcomes for newly launched paid sharing markets.
UBS is anticipating that Netflix’s 2Q will come in higher than management’s guidance, with projected revenue and operating income growth of 5% and 4% respectively, higher than the previous estimates of 4% and 2%.
“With engagement trending similar if not better than recent quarters in all markets, this gives us greater confidence that the impact of password sharing on churn was measured,” analysts wrote.
That sets Netflix up for a stronger second half of 2023.
Revised estimates indicate the addition of 3.6 million and 6.5 million users in the second and third quarters, resulting in a 2023 estimate of 18 million users compared to the previous estimate of 12 million for the year 2023 and 9 million in 2022, analysts noted.
As a result, 3Q guidance will indicate faster revenue and operating income growth, with projected figures of 14% and 28% respectively, higher than the street's estimates of 9% and 20%.
The positive impact of paid sharing is expected to contribute to these results, UBS highlighted.
For the full year 2023, the analyst foresees a 9% revenue growth and 11% EBIT (earnings before interest and taxes) growth, with further acceleration to 15% and 30% in 2024.
Assuming content spending of $16 billion in 2023 and $17 billion or more in 2024, the analyst expects free cash flow of $4.5 billion and $6.9 billion for 2023 and 2024 respectively, compared to the previous estimates of $4.2 billion and $6.1 billion.
Netflix shares got a boost in premarket trading on Wednesday but settled around 0.4% higher at $441.84 by market open.
Contact Angela at angela@proactiveinvestors.com
Follow her on Twitter @AHarmantas