Yahoo Finance Netflix's password crackdown turns a Wall Street bear positive
Netflix's (NFLX) password-sharing crackdown may be causing family fights over the streaming bill. But it's having some positive effects on the stock so far.
Late Tuesday night, Goldman Sachs joined the growing list of Wall Street firms that believe the streaming giant's password advancements make the stock a more attractive buy. Netflix's controversial password-sharing crackdown hit the US in May.
"NFLX [management] has executed its password sharing initiative in excess of our prior assumptions, has regained content creation momentum in a manner that has muted any post-pandemic growth headwinds and overall industry competition has become more muted (especially from traditional media companies) in the past six months," Goldman Sachs analyst Eric Sheridan wrote in a note late Tuesday night.
Sheridan upgraded the stock from Sell to Neutral and boosted his price target from $230 to $400. Sheridan had slapped a Sell rating on Netflix in June 2022 foreseeing a "series of headwinds" including a post-pandemic subscriber normalization.
But in the past year, Netflix has built out an ad tier that's drawn 5 million monthly active users, and most recently, it has drawn new subscriptions in the US after limiting password sharing.
Amid the changes, Netflix's stock has soared. Shares have risen about 135% since Goldman Sachs initiated its sell rating last year, per Sheridan.
Netflix stock added to those yearly gains on Wednesday, rising more than 2% in early morning trading.
As Yahoo Finance's Alexandra Canal has been tracking, at least four other Wall Street firms have raised their price targets on Netflix in the last several weeks leading into Netflix's second quarter earnings release, which is expected on July 19.
"We increasingly view NFLX's crackdown on password sharing and the AVOD (advertising video on demand) opportunity as inextricably linked," Bank of America analyst Jessica Reif Ehrlich wrote in a note to clients on June 13. "At the $6.99 price point, the ad-supported tier provides an attractive low-priced option for 'borrowers' who still wish to access the Netflix service. In our view, the broader crackdown on password sharing will be an accelerant to NFLX's ad-supported tier."
Sheridan notes the "key debate" over Netflix has been whether it can capture the roughly 100 million households that had been using Netflix through password sharing.
Goldman Sachs mapped out a scenario where Netflix converts 40 million password sharers to add-on members at $7.99 per month by the end of 2023 and 30 million sharers convert to their own ad-supported tier subscription (which generates an average monthly revenue per user (ARPU) of $15, per Goldman Sachs).
These estimates have Goldman Sachs projecting Netflix revenue to increase from $31.62 billion in 2022 to about $49 billion in 2025.
"Better than expected execution on the paid sharing initiative could result in meaningfully higher ARPU growth and ultimately higher revenue and operating margins," Sheridan wrote. "Conversely, if paid sharing results in an uptick in churn levels and/or downgrades to lower-priced tiers, our operating assumptions may be overstated."
Josh is a reporter for Yahoo Finance.
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