How Will The Password Sharing Crackdown Help Netflix Q3 Results?

Netflix (NASDAQ:NFLX) is slated to report its Q3 2023 results on October 18th. We estimate that Netflix’s revenue will come in at a little over $8.50 billion for the quarter, marginally below consensus estimates and the company’s guidance. This would mark year-over-year growth of roughly 7.5%. We estimate that earnings will stand at $3.50 per share, also roughly in line with the consensus. So what are some of the trends that are likely to drive Netflix earnings for the quarter? See our interactive dashboard analysis on Netflix Earnings Preview for more details on how Netflix’s revenues and earnings are likely to trend for the quarter.

We note that NFLX stock has had a Sharpe Ratio of 0.5 since early 2017, which is in line with the 0.5 ratio for the S&P 500 Index over the same period. This compares with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Netflix began rolling out restrictions on password sharing in the U.S. and over 100 other countries in late May 2023, requiring users to pay an additional monthly fee (about $8 in the U.S.)  to share accounts with users outside of their households. The move appears to have gotten off to a strong start, with Netflix adding 5.9 million subscribers over the second quarter, with the company noting that sign-ups exceeded cancellations – an indication that the reaction to the big move was relatively favorable. Revenue growth is expected to pick up in Q3, as the company sees the full impact of the password sharing crackdown. Separately, Netflix’s ad-supported plan could also potentially start playing a bigger role in the context of Netflix’s overall business. The company upgraded the streaming resolutions on the plan to 1080p (up from 720p) while supporting two concurrent streams. Netflix has previously indicated that the average revenue per membership for its ad-supported plan has exceeded its standard plan, accounting for both subscription fees and advertising revenues.

Although we think that Netflix stock could move slightly higher if it beats earnings, we believe the stock is fully valued at current levels of about $377 per share. The streaming wars are heating up and it’s likely that mounting competition could put a lid on the company’s overall growth in the long run. Moreover, concerns about the broader macroeconomic picture could also weigh on players such as Netflix who are dependent on growing consumer spending. The company raised prices across its plans last year, bringing the standard HD plan to $15.49 per month and there have been reports that another price hike is in the cards once the Hollywood writers’ strike ends. We have a $377 price estimate for Netflix. See our analysis Netflix Valuation: Expensive or Cheap for more details on what’s driving our price estimate for Netflix. Also, check out the analysis of Netflix Revenue for more details on how Netflix revenues are trending.

[1] Month-to-date and year-to-date as of 10/6/2023
[2] Cumulative total returns since the end of 2016

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