Bank raises Netflix to ‘Buy’
January 14, 2023
Investment bank Jefferies, in a major review of US Media & entertainment, offers a wide variety of advice to clients including a downgrade (to ‘Hold’) for music streaming service Spotify and Roku (to ‘Underperform’) but with an upgrade (to ‘Buy’) for Netflix.
The bank’s report doesn’t shy away from the risks for Netflix and the uncertainty over the success – or otherwise – of the streamer’s advertising supported version. “Netflix’s slower ad tier roll out likely means a prolonged headwind and 1H/2023 data points will likely appear volatile,” says Jefferies, adding that it expects blue-chip advertisers will shift more of the ad-dollars towards Netflix (and Disney+).
Despite these risks the bank says it is upgrading Netflix because it believes that the streamer has a well executed strategy of launching AVoD with password sharing changes will drive revenue and EBTIDA well above Street estimates, resulting in margin upside and valuation expanding back towards historical averages.
Jefferies estimates that there are around 100 million shared passwords (“password stealing households”) and that some 80 million households are participating as sharers. The bank estimates a 50 per cent retention rate by the end of this year growing to 67 per cent by 2024.
The bank expects Netflix’s content spend to stay roughly flat at about $17 billion until the streamer’s revenue reaccelerates in 2024 which will result in significant margin expansion for Netflix.
The end result, says Jefferies, is that Netflix will demonstrate its importance to consumers as a “staple” in terms of discretionary spend, with confidence being restored in Netflix’s ability to navigate a changing business landscape.
One key element of the Jefferies report is that Netflix will also show its ability to weather what the bank describes as “unsustainable content spend from competitors”.