Netflix: An Uneventful Quarter Blighted by Password Crackdown

We’re sceptical paid sharing will significantly increase new subscriber growth

Neil Macker 26 April, 2023 | 9:03AM
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A picture of Netflix headquarters.

Netflix Stock at a Glance

• Current Morningstar Fair Value Estimate: US$315

• Stock Star Rating: 3 Stars

• Uncertainty Rating: Very High

• Economic Moat Rating: Narrow

Netflix Earnings Update

Netflix NFLX posted a quiet start to 2023, adding only 1.75 million net subscribers, well short of our estimate. The firm announced a number of initiatives including shutting down its legacy DVD mail rental business at the end of September. Management also disclosed that the password sharing crackdown – paid sharing – will roll out to most of the world in the second quarter, including the US.

While no details were provided, we expect the program in the US to look almost identical in pricing and structure to the one in Canada that cost $5.80 per extra member slot, with one slot available on the standard plan and two on the premium plan. We still believe this plan will boost revenue, but we remain skeptical that it will significantly increase new subscriber growth from users left off existing plans.

We keep our $315 fair value estimate.

Netflix Shows Paid Subscriber Growth

Netflix ended the quarter with 232.5 million global paid subscribers, up from 230.7 million last quarter and 221.6 million a year ago. Asia-Pacific and Europe continued to drive customer growth in the quarter. As previously disclosed, the firm no longer provides specific subscriber net additions guidance as management tries to shift focus away from subscriber growth to revenue and cash flow expansion. However, Netflix expects "net adds in line with the first quarter" for the second quarter versus loss of 1 million in the same quarter of 2022.

Foreign exchange remained a significant headwind to revenue, which was up 4% (8% excluding currency impact) to US$7.9 billion, slightly below our estimate. Revenue in the U.S. and Canada grew 8% year over year as average revenue per user improved 9% to US$16.18 due to the 2022 price hike. The region only added 0.1 million net new customers during the quarter. Netflix’s most profitable region has gained just 13,000 subscribers over the last eight quarters. We still project that attracting new subscribers in the US and Canada will remain challenging due to the service’s high penetration rate and intensified competition.

bulls Bulls Say...

  • Netflix's internal recommendation software and large subscriber base give the company an edge when deciding which content to acquire in future years;
  • Netflix has built a substantial content library that will benefit the firm over the long term;
  • International expansion offers attractive markets for adding subscribers.

bears Bears Say...

  • The firm continues to burn billions to create its original content with no end in sight;
  • The level of competition in the US and internationally is increasing and will continue to do so. Disney+ launched its own branded SVOD service in the second half of 2019;
  • The need for increased content and marketing spend outside of the US will limit the rate of margin expansion for the international segment.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Netflix Inc661.97 USD2.00Rating

About Author

Neil Macker  is a senior analyst, Morningstar Inc

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