Analyst Upgrades Netflix as Top Dog in Streaming Struggle

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Netflix, which teased its would-be streaming rivals for losing billions while it’s in the (Orange is the New) Black, gained a new supporter on Wall Street as Wells Fargo analyst Steven Cahall upgraded it to “overweight” from “equal weight.”

“Our deep dive into Netflix sees content improving churn while AVOD and paid sharing improve estimates,” Cahall said in leading off his latest research note, which targets Netlflix’s stock price rising to $400 from yesterday’s close of $310.26, which is up from a low of $162.71 but still well below a 52-week high of $630.24.

The streaming business has been rejected by Wall Street because of high spending on content and an uncertain profit outlook, especially for traditional media companies looking to take on Netflix as their cable and broadcast businesses falter amid cord-cutting.

Cahall said competition indeed made things tough for Netflix in 2022. But he sees the streaming service turning the corner in 2023 and beyond.

First of all, an upcoming content slate should increase engagement and cut churn. Already, monthly average users are up 6% Cahall said.

“We see churn improving in ’23 due to content plus AVOD plus paid sharing, and 10 basis points of churn equals about10mm subs. So, we feel better on subs, while ads drive us ahead on revenues,” he said.

Speaking of advertising, Cahall expects Netflix’s Madison Avenue adventure to be accretive by the second half of 2024.

He expects the lower-priced ad tier to attract 23 million incremental subscribers by 2025, giving Netflix about 279 million global subs, up from a prior estimate of 256 million.

“We don't see how AVOD isn't anything other than incremental to subscribers,” Cahall said.

In terms of revenue, Cahall is estimated the ad business will generate about $12 a month in average revenue per user in 2023. He expects Netflix’s ad-supported basic tier to add revenues of $300 million in 2023, rising to $1.6 billion in 2024 and $3.4 billion in 2025, including $1.5 billion, $4.3 billion and $8.1 billion in those years, respectively.

Cahall is estimating Netflix will have 7% revenue growth in 2023. For 2025, Cahall says his current estimates for revenue, operating income and earnings per share are 4%, 13% and 20% respectively above the current Wall Street consensus.

“After a period of turmoil around slowing subscribers and revenue growth, NFLX is using every arrow in the quiver,” Cahall said. “The hits never seem to stop coming over any reasonable period. We see NFLX as one of the co-leaders in global streaming and over time we expect market share to benefit the few scaled players.” ■

Jon Lafayette

Jon has been business editor of Broadcasting+Cable since 2010. He focuses on revenue-generating activities, including advertising and distribution, as well as executive intrigue and merger and acquisition activity. Just about any story is fair game, if a dollar sign can make its way into the article. Before B+C, Jon covered the industry for TVWeek, Cable World, Electronic Media, Advertising Age and The New York Post. A native New Yorker, Jon is hiding in plain sight in the suburbs of Chicago.