Netflix (NFLX) shares have not done well this year, tumbling nearly 68%. As the streaming giant gets ready to announce its Q2 earnings today, will the results be enough to trigger a rebound?
Wedbush analyst Michael Pachter believes that Netflix’s stock price is unlikely “to approach 2021 levels for many years.” However, the analyst continues to be bullish about the stock with a Buy rating. Let us look at the reasons behind analyst Pachter’s optimism.
Netflix Is Likely to Lose Fewer Subscribers
Netflix has forecasted revenues of $8.05 billion in Q2, up 9.7% year-over-year, while diluted earnings are expected to be $3 per share, compared to $2.97 for the same period a year ago. However, Wall Street analysts are expecting NFLX to generate revenues of $8.03 billion and diluted earnings of $2.96 per share.
Meanwhile, Pachter’s estimates suggest revenues of $8.13 billion in Q2, which is above the consensus estimates as the analyst expects Netflix to lose 1.5 million subscribers on a global basis. This is below Netflix’s estimate of global subscriber losses of 2 million.
According to Pachter, Netflix is likely to have driven “incremental viewership with Stranger Things 4 and likely limited churn by splitting up the content dumps between Q2 and Q3.”
The analyst added, “Given the strong viewership over the course of Q2, we think subscriber numbers will beat low expectations set by management.” What’s more, the analyst expects Netflix to forecast a gain in subscribers in the third quarter and anticipates its shares “to rally significantly.”
Pachter also elaborated on Netflix’s recent changes in its business model.
Netflix’s Crackdown on Password Sharing Households
Netflix announced in its Q1 earnings call that it was planning to crack down on password-sharing households. According to NFLX, around 30 million households in the U.S. and Canada (UCAN) and 100 million households globally are sharing passwords.
However, Pachter is skeptical about the 30 million figure, pointing out that Netflix has penetrated 75 million out of 130 million households in UCAN and, by his reckoning, “the addressable market (broadband penetrated households) is only around 110 million, meaning that only 35 million addressable households are not yet Netflix customers.”
The analyst added that there are at least 20 million households that neither watch television nor can afford Netflix, and as a result, the number of password-sharing households is more than likely to be around 15 million in this region.
Is Netflix’s Decision to Introduce an Ad-Supported Tier a Good One?
Another change that Netflix has made to its business model is the introduction of an ad-supported tier.
Pachter estimates that this ad-supported model could “generate as much as $10 per month per subscriber in ad revenues, based on comparable rates generated (on a per hour basis) by fuboTV, The Roku Channel, and Hulu.”
However, the analyst stated that this ad revenue is unlikely to be incremental “and Netflix would be required to offer a lower-priced monthly subscription in order to induce customers to sit through four minutes or more of advertising per hour.”
Pachter expects that this ad-supported model is likely to be priced at $6.99 per month and that 10% or more of Netflix’s 75 million customers in the UCAN are likely to opt for the ad-supported tier.
Wall Street Intent on Holding NFLX Stock
The analyst has a price target of $280 on the stock, implying an upside potential of 48.1% at current levels.
However, Wall Street analysts are sidelined about Netflix with a Hold consensus rating based on 10 Buys, 25 Holds, and six Sells. The average Netflix price target of $256.50 implies an upside potential of 35.6% at current levels.
Bottom Line
It remains to be seen how Netflix performs in Q2. However, the success of Stranger Things 4 and a change in its business model could augur well for the company.
Notably, Netflix’s website visits are not very encouraging right now. According to the TipRanks Website Traffic tool, total unique visitors on all devices were down 16.6% year-over-year in Q2.
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