Netflix needs to put on another big subscriber show

Netflix shares tend to react badly to disappointing subscriber numbers; the stock has crashed by an average of nearly 18% on the past four occasions that the company’s net paid additions fell short of Wall Street’s targets. (Photo: Getty Images via AFP)
Netflix shares tend to react badly to disappointing subscriber numbers; the stock has crashed by an average of nearly 18% on the past four occasions that the company’s net paid additions fell short of Wall Street’s targets. (Photo: Getty Images via AFP)

Summary

The streaming giant began a crackdown on password sharing last year, and investors are getting their hopes up for another subscriber-growth bonanza this year.

Hopefully, Netflix missed some freeloaders the first time around.

The streaming giant began cracking down on password sharing in the middle of last year. To call the effort successful would be an understatement. Netflix added nearly 22 million net new paid subscribers in the second half of 2023—a record for that period and more than double what it added in the second half of 2022. The company cited paid-sharing “interventions"—prompts for subscribers sharing their passwords with others outside their households to pay extra or get them their own account—as a big driver of that growth, and suggested there was more to come. “We’re going to continue to deliver [interventions] to new cohorts in 2024," Netflix co-Chief Executive Greg Peters said on the company’s fourth-quarter earnings call in January.

Just how much more is a key question heading into the company’s first-quarter report, slated for next Thursday. Netflix itself gave a wide range, saying only that it expects first-quarter subscriber additions to come in above the 1.8 million it reported in last year’s first quarter but below the 13.1 million added in the fourth quarter. Official consensus estimates are seemingly modest, with analysts expecting a little over 4 million net new subscribers in both the first and second quarter, according to Visible Alpha.

But less-official expectations may be well above that. In a report Monday, Citigroup analyst Jason Bazinet cited “conversations with investors" suggesting an expectation for 8 million subscriber additions in the first quarter. On the same day, J.P. Morgan analyst Doug Anmuth boosted his own subscriber target from 4.5 million to 6 million, adding “though we recognize investor expectations are likely more toward 7M-8M."

Expectations are certainly high. Netflix shares have been on a tear, surging nearly 66% over the past six months, which is more than triple the performance of both the Nasdaq and S&P 500 in that time. That is mostly thanks to the strong subscriber growth the company has delivered in its past two earnings reports. The run-up has also put the stock back above the $600 mark for the first time since late 2021, when the shares peaked following an 18-month, pandemic-induced rally.

Netflix first sized up its paid-sharing opportunity two years ago, when it shocked investors with its first-ever drop in subscribers and disclosed—for the first time—that more than 100 million households were viewing its service using accounts paid for by others. The easiest targets may have already been hit; Mark Mahaney of Evercore ISI estimates that about 80% of U.S. users sharing an account have already received an intervention notice.

But Mahaney’s survey of Netflix users last month found the rate of paid-sharing interventions has been much lower in markets like Japan, as well as “edge cases," such as those who only view Netflix on mobile devices. Anmuth of JPMorgan estimates the company can convert 36 million borrowers this year. “While the lowest hanging fruit was captured in 2023, we believe Netflix still has a meaningful paid sharing monetization opportunity as it tightens filters across specific use cases and borrower cohorts," he wrote.

Those who have bid the stock to near-record levels lately better hope those forecasts are right. Netflix shares tend to react badly to disappointing subscriber numbers; the stock has crashed by an average of nearly 18% on the past four occasions that the company’s net paid additions fell short of Wall Street’s targets, according to FactSet. Netflix has made a pointed effort over the past year to get investors to focus on revenue growth over subscriber growth. But that is one show that hasn’t caught on just yet.

Write to Dan Gallagher at dan.gallagher@wsj.com

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