Netflix Analysts Weigh In On New Ad Tier's Impact, Q1 Guidance, Hastings' Stepping Down, Stock Valuation After Q4 Results

Netflix Inc. NFLX shares rallied on Thursday in after-hours trading following the release of its quarterly results.

Key Banc Says Multiple Expansion Unlikely: Net paid adds were materially better than expected in Latin America but slightly below expectations in the U.S. and Canada, KeyBanc Capital Markets analyst Justin Patterson said. Fourth-quarter revenue was below KeyBanc’s estimate, he said, adding that the linearity may have contributed to the miss.

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Dissecting the first-quarter guidance, Patterson noted that the company expects net paid adds to be moderately positive but below fourth-quarter levels. This, according to Patterson, was consistent with normal seasonality.

The revenue guidance of $8.17 billion has factored in some conservatism around both ad-supported revenue and the impact of the paid sharing, he said. The operating margin guidance trailed KeyBanc’s estimate, with the company suggesting the relatively soft number was due to the timing of content spend, he added.

Patterson said he wasn’t overly surprised at Hastings transitioning to executive chairmanship and Greg Peters' elevation to the co-CEO's role. Product initiatives such as paid sharing and advertising, which are handled by Peters, are of strategic importance, Patterson said.

Paid sharing, which is expected to roll out in the first quarter, will result in higher net paid adds in the second quarter than in the first quarter, the analyst said. The company expects some cancels in each market initially before seeing improved engagement, Patterson added.

Netflix said it has seen very little switching from other plans to ad-supported tier and expects it to contribute incremental revenue and profits, the analyst noted. The impact on financials will be modest and build slowly over time, Patterson said, citing the company.

With Netflix planning to expand its games offering in 2023, the company can attract talent at reasonable prices due to the breadth of layoffs in the video game sector, Patterson said. He sees games as a multi-year initiative.

The forward P/E is now back to levels in the first quarter of 2022, suggesting more material revisions are needed for upside, Patterson said. Multiple expansion is less likely from current levels until either net adds re-accelerate or paid sharing drives meaningfully higher average revenue per user and free cash flow, Patterson added.

Patterson has a Sector Weight rating on Netflix shares.

Results Testimony To Netflix's Original Content, Munster Says: Netflix’s revenue guidance called for 4% revenue growth, Loup Fund’s Gene Munster said. “Maintaining numbers in this environment is equivalent to raising numbers in a normal environment,” he added.

Munster said the company's estimate translates to around 200,000 paid net subscriber adds in the March quarter, reversing from a loss of 200,000 net paid adds a year ago. This is a sign that the company is holding its ground against competition, he added.

Netflix’s results show that consumers are paying for the streaming service despite tightening their belts, Munster said. He sees this as a testimony to the quality of the company’s original content.

New Ad-Supported Plan Is Working, Says Gary Black: Netflix’s fourth-quarter results send a strong signal that the new lower-priced ad tier, which costs subscribers $6.99 per month, is working, Future Fund analyst Gary Black said.

The ad-supported tier, which was $3 cheaper than the $9.99/month basic plan, was rolled out in November. In late December, reports suggested the reception to it was lukewarm, with only 9% of the new U.S. Netflix subscribers opting for the service, data analytics firms Antenna said.

Price Action: Netflix shares climbed 7.12%, to $338.27, in after-hours trading on Thursday, according to Benzinga Pro data.

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