Undoubtedly, Netflix (NASDAQ:NFLX) is one of the most popular streaming services globally. However, not all is going too well with its stock over the past few years. Now trading around $330, it’s significantly down from its all-time high of around $700 seen in October 2021. The dip in stock price, along with Netflix’s active growth initiatives, particularly the potential revenue opportunity from addressing account password sharing, may attract investors and benefit the company. However, considering the ongoing macroeconomic uncertainties, I will wait and watch before buying the stock over the coming months.
Recent Events: Mixed Q1 Results & WGA Strike
On April 18, Netflix reported mixed Q1 results. Earnings were slightly ahead of expectations, while revenues missed. More importantly, investors focused on the outlook, but that also lagged expectations. As for Q2, revenues are expected to grow by a mere 3% year-over-year to $8.24 billion (consensus was $8.48 billion).
Further, management stated that the implementation of its paid-sharing action, initially expected in the first quarter, has been delayed and is now anticipated to take place by the end of this quarter.
On a positive note, however, Netflix’s free cash flows have been steadily improving to $2.1 billion in Q1 versus $0.8 billion in the prior-year period. In fact, the company now expects to generate at least $3.5 billion in free cash flow this year versus the $3.0 billion expected earlier.
Separately, the recent strike by Hollywood’s writers’ union represented by the Writers Guild of America (WGA) is catching the attention of investors and is also adding to the woes of the streaming world. Though Netflix feels confident that it has enough content in the pipeline, if the strikes go longer than expected, it could impact Netflix’s revenues and profitability.
Growth Strategy: Password-Sharing Monetization
Netflix has reached a stagnant period of growth with lower demand due to heightened inflation, higher costs, and competition from peers like Amazon (NASDAQ:AMZN), Warner Bros’ HBO (NASDAQ:WBD), and Disney (NYSE:DIS). During the first half of 2022, NFLX’s subscriber count fell by over one million due to prices. To win subscribers back, Netflix made price cuts in more than 30 countries in February.
One thing that could come to Netflix’s rescue is its crackdown on password sharing that began earlier this year. In the coming months, users will need to pay an extra fee if they share a password with people they do not live it. According to Netflix, a shocking number of over 100 million people use Netflix’s services without paying the subscription fee.
While this is expected to generate negative reactions from users in the short term, it will likely be beneficial for Netflix in the long run. In fact, several Wall Street analysts estimate that Netflix could soon report double-digit revenue growth with meaningful upside potential regarding its margins and free cash flows.
Advertising Revenues Growth Could be a Long-Term Revenue Driver
Finding another way to stay ahead of peers, Netflix also unveiled a less expensive “Basic with Ads” streaming plan. The ad-supported service started in 12 countries in November 2022. This meant that Netflix, well-known for its ad-free streaming earlier, is now offering services at a lower price with advertisements showing in-between. The action helped grow its total subscriber count during the last quarter of 2022 across all regions. Indeed, global streaming paid net additions increased by 7.66 million during Q4 2022, surpassing Netflix’s own expectations of 4.5 million.
While this number may look impressive, it doesn’t still excite me until higher subscriptions convert to significantly higher revenues. That did not happen in Q4 2022. For instance, Netflix’s Q4 average revenue per user (ARPUs) decreased to $11.49 compared to $11.74 in the prior-year period despite total subscribers increasing during the quarter.
Positively, however, the incremental revenue generation from advertisements could be a direct boost to revenue growth in the long term. In fact, according to Insider Intelligence, Netflix could report 2023 US ad revenues of $830 million. Furthermore, that number could go up to over $1 billion in 2024.
With a presence in over 190 countries, the company also aims for profitable diversification to boost its growth prospects. For instance, it is well-known that viewers worldwide love K-drama. Likewise, Netflix plans to invest $2.5 billion in making Korean movies and television shows over the next four years. In addition, the company is planning to exit its more than 25-year-old DVD business, as it has been shrinking over the years.
Is Netflix Stock a Buy, According to Analysts?
Turning to Wall Street, analysts are cautiously optimistic about Netflix stock and have a Moderate Buy consensus rating based on 18 Buys, 13 Holds, and two Sells assigned in the past three months. Netflix’s average price forecast of $368.60 implies 11.3% upside potential.
Conclusion: Keep a Close Eye on Netflix
The positive measures, such as addressing user account password sharing and introducing lower-priced plans with advertisements, will most likely boost revenues in the coming quarters. With the new CEO Greg Peters at the helm after the departure of long-standing co-founder and co-CEO Reed Hastings, it remains to be seen how fast the growth strategy leads to higher profitability.
However, considering the challenging macroeconomic environment, I prefer to see actual figures instead of relying on expectations. Until then, I will wait and keep a close eye on the stock in the coming months.
