Netflix (NFLX) shares are down about 10% over the past month, fueled by a mid-July sell-off that came after the company reported revenue guidance that missed Wall Street’s expectations for the current quarter.
Shares have remained under pressure in recent weeks, triggered a wider sell-off in Big Tech that continued on Monday with the stock falling roughly 3% in early trading.
But one analyst thinks the recent retreat has created a buying opportunity, arguing the company is well-positioned to hike subscription prices later this year.
“We are increasingly bullish on the recent 10%+ pullback in the stock, as we believe a Q4 US price hike is possible on the back of an impressive content slate,” Jefferies lead analyst James Heaney wrote in a note to clients on Monday.
Heaney called out upcoming series like “‘Stranger Things 5” and “Squid Game 2,” along with the recent acquisition of live sports content like the NFL Christmas Day games and WWE Raw, which will kick off in January 2024.
The combination of that strong content slate along with potential price increases “could serve as a catalyst for ad tier adoption,” he said, predicting a likely boost to year-end subscribers.
“We expect NFLX to accelerate subscriber growth in Q4 leading us to +7.45 million net adds (vs +3.75 million in Q3) and ahead of consensus estimates of +7.2 million,” the analyst said.
Netflix last hiked the price of its popular Standard plan in January 2022, upping the cost to $15.49 from the prior $13.99. It also raised the price of its Premium tier by $2 to $19.99 a month at the time before hiking the cost of that plan once again in October to $22.99.
The company has yet to raise the price of its less than two-year-old ad-supported offering, which remains one of the cheapest ad plans among all of the major streaming players at a price point of $6.99 a month.
Netflix has previously said its goal is to make ads “a more substantial revenue stream that contributes to sustained, healthy revenue growth in 2025 and beyond.” It will phase out its lowest-priced ad-free streaming plan as a result, making the the $15.49 Standard plan its lowest priced offering for ad-free experiences.
But Jefferies said the Standard plan will likely be the one hit with a December price hike, especially given the company’s recent foray into live sports — a move that further “increases [its] pricing power.”
“We believe NFLX has been positioning itself throughout this year for a year-end price hike,” Heaney said. “We view the venture into NFL games (at just ~2% of annual content spend) as a significant Q4 subscriber driver, creating a further tailwind to NFLX’s password sharing initiative and supporting a price hike.”
The analyst made the comparison to Peacock, which added 3 million subscribers in the first quarter on the heels of airing an NFL wildcard game.
“The NFL games will give advertisers the first true peek at NFLX’s scale,” Heaney said. “Ultimately, this could lead to an acceleration of ad tier adoption and expected ad ARPU growth for 2025 (which has been a drag on recent quarters.)”
In last month’s earnings release, Netflix said it’s making “steady progress scaling [its] ad business” with ad-tier memberships growing 34% quarter on quarter, boosted in part by the removal of the basic plan in certain markets.
“Given this sustained progress, we believe that we’re on track to achieve critical ad subscriber scale for advertisers in our ad countries in 2025, creating a strong base from which we can further increase our ad membership in 2026 and beyond,” the company said.
When asked on the earnings call last month whether or not the company would consider raising the $6.99 price point of the ad tier to to boost its average revenue per member, Netflix co-CEO Greg Peters said they “think about pricing for the ads tier very similarly to how we would think about pricing for our non-ads tier.”
“It’s our job to increase the value that we are delivering all of our members,” Peters said, citing the company’s recent live events push, along with new original programming and games. “When we have signals from our members [like acquisition, engagement, retention, and churn] then we find the right moment to ask our members to pay a bit more to keep that flywheel spinning.”
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at [email protected].
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