Netflix is Positioned for Profitability Boost with Ad-Supported Tier and Password-Sharing Crackdown: Analyst

Wedbush analyst Michael Pachter reiterated Netflix Inc NFLX with an Outperform and a $475 price target.

Given Pachter's view that the company can generate significantly more free cash flow than its guidance suggests, Netflix remains on Wedbush's Best Ideas List. 

He thinks Netflix has reached the right formula with its global content to balance costs and generate increasing profitability. At the same time, its ad-supported tier and password-sharing crackdown should further boost cash generation. 

The analyst thinks Netflix is well-positioned in this murky environment as streamers are shifting strategy. Even while ads are not yet directly accretive, the ad -tier should continue reducing churn and attracting new subscribers. 

Given its strong viewership and brand recognition, Pachter thinks that Netflix can hold on to its industry-high CPMs despite the challenging advertising market. 

The analyst's positive thesis on Netflix partially relies on the password sharing crackdown, both a) driving ARPU higher and b) driving subscriptions higher. 

Recently released Antenna data showed a significant spike in subscriber growth. Netflix may include the additional out-of-household subscribers ($7.99 per month, each add-on subscriber) in a single subscription, which would drive higher ARPU. 

Meanwhile, subscriptions would still likely grow nicely as many piggybackers get kicked off and want their subscriptions. Or, Netflix may instead count the additional out-of-household subscribers as stand-alone subscribers. That would drive massive subscriber growth while dropping stated ARPU as it is cheaper than all but the ad -tier ($6.99 per month). 

In either case, the Antenna data was encouraging and supports our view that Netflix will benefit meaningfully from this crackdown. 

Given its low price point, the ad-supported tier will be a compelling option for former piggybackers. With the influx of all these new subscribers, Netflix can spend a portion of its increased revenue on adding more high-quality content. 

Its ad-tier subscription benefits directly from viewership. And as viewership on its ad -tier grows, so too should its profitability. 

He thinks the combination of its password-sharing crackdown and ad-tier launch will drive Netflix's profitability and free cash flow generation higher than ever. Netflix issued FCF guidance of $3.5 billion for 2023 after printing over $2 billion of FCF in Q1 alone. 

The analyst expects FCF to grow steadily, particularly if ARPU rises from the password-sharing crackdown and higher CPMs from the ad -tier. 

Netflix may not see the rapid subscriber growth that it used to enjoy, but the company is now highly profitable and mature. Its free cash flow generation and ability to return that to shareholders via share buybacks or dividends is a clear positive. 

The analyst conservatively maintained his Q2 estimates for revenue of $8.242 billion vs. consensus of $8.276 billion and guidance of $8.242 billion. 

As it adds users at virtually no incremental cost, there could also be a meaningful upside to Q2 EPS of $2.84, in line with guidance and consensus.

Price Action: NFLX shares traded lower by 2.09% at $440.95 on the last check Friday.

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