Netflix among the worst performing names in the NASDAQ 100
this week,
but the stock's been an out performer so far this
year,
up 34%. The company is set to report earnings on
Thursday.
And joining us with a preview is Laura Martin of
Needham.
Just a buy rating on the stock and a
$700.00 price target. It's not too much higher from here,
but it is higher. Laura,
what's the upside that you expect in this earnings report
next week?
So I mean, I think we're waiting to hear now
that they've actually anniversaried their password sharing,
how many Subs they're going to add.
So last quarter, they added 9 million Subs.
We're projecting 2 million and 4 million next quarter.
But if there's any kind of weakness in those,
that would be bad for the share price.
We're also looking at where the Subs are added because
recall that the US ARPU or average pricing is 2
times higher than both Latin America and AIPAC at
$16.00 a month here. So it really matters where they're
adding subscribers.
Otherwise there's a threat to the revenue growth line,
which we don't want to see.
We don't want to see a slowdown in the revenue
growth line
from that 15% that they already reported in Q1 and
we're projecting for Q2.
All of those would hurt the stock if they don't
hit hit those metrics or over deliver them.
And then I really care about the content budget.
They have told us that they are not spending more
than 17 billion.
But recently they announced they're doing two NFL games on
Christmas Day.
And I want to make sure that we're not seeing
the content budget creep up
to pay for sports because that means they're it's a
bad sign if they're going to be in these big
wars for big NFL pack packages at Netflix,
right? Yeah. You don't, you don't want them getting into
a,
a spending competition with some of those mega caps out
there.
I I'm wondering about the impact on Netflix
as mainstream consumers are feeling a pinch.
We saw impact on the big banks today on some
of those stocks,
you know, net interest income and things like that.
But I know the prevailing wisdom is Netflix is the
last subscription service that you drop.
But are there churn dangers?
Are there dangers of the ad tier not monetizing as
well as investors might be hoping?
Yes, absolutely danger. The parks data out last week said
that the average spending on streaming has gone down from
$90.00 a month in the first quarter of 22 to
$63 a month in the first quarter of
2024. In part because all of these ad driven tears,
people are sort of down grading how much they spend
per service.
But what Netflix has told us is that people do
not move from whatever tier they start at,
which would imply if you get
if, if Netflix because it's raised prices is taxing you
too much,
people just disconnect. They actually don't move down to the
ad tier,
which is counterintuitive, but that is what Netflix tells us.
Do we need to think about hits here?
I mean, the, the movie theaters are are having a
strong summer with some of the names,
but we're waiting for Stranger Things
from Netflix. If people are turning off more often,
are they going to turn back on
if I can even say that
sign sign on for these big hits and is that
going to have some stock impact you think?
Absolutely yes, because what we see in the under 30
year old is that they churn through these services.
They go to a service they pay for a month.
It is silly that Netflix drops these popular series all
on the same day.
So you know, 20 something can watch the entire season
on one week.
But anyway, be that as it may,
they then leave and they go to HBO or whoever's
content is super cool.
So they're turning four or five times a year.
So I do expect if you get hits for people
to come to the service and watch the hits and
hopefully like forget they they've subscribed,
but younger people won't forget that and they'll churn out.
It would be much more.
It would be much better if they did what every
other service does,
which is sort of launch an episode every week for
two or three months.
And so they would get three months worth of lower
churn because people would want to stay till the end
of the series.
Now, even though you got to buy on this,
it sounds to me like you might be expecting more
volatility in the stock.
There's certainly lots more question marks,
whether we're talking about how much they're spending on football
or when they're releasing things or when they're saying that
they're dropping things.
How should investors think about entry points and and when
they get in here?
Well, I think this this quarter we're about to hear
on Thursday next week is sort of mission critical because
we're going to get a same store subscriber growth number
after password sharing has sort of anniversaried in America.
So that's super important. So if it turns out instead
of my 2 million ads,
they do 3 million ads or 4 million ads,
all of the models are going to go up because
we're going to say,
OK, that's normal and we were a million Subs too
low.
So we'll take all of our subscriber estimates up.
And then we just need to look at where they
are happening.
Are they happening in the
$16.00 a month ARPU world,
which is the US? Are they happening in an $8
ARPU world in Latin America or APEC or it's I
think $10.00 or $12.00 in the EU?
So I think, I think our models are sort of
waiting to see we're reviewing this quarter that's about to
come next week as a normalized quarter.
And from that, we're going to change our discounted cash
flows for like the next three years.
So I expect volatility around this quarter,
either the upside or the downside.