Analyst Expects Better Netflix Q3 Fiscal Results

A leading analyst predicts better times ahead for Netflix. 

The subscription streaming giant is projected to generate 1.45 million net new subscribers in the third quarter (ended Sept. 30), according to Wedbush Securities media analyst Michael Pachter. That’s up almost 500,000 subs from industry forecasts and Netflix’s own guidance.

“Based on Netflix’s published weekly top 10 viewing lists, as measured by Nielsen, we estimate that Q3 viewing hours were up 14% year-over-year, and up 9% from Q2,” Pachter wrote in a note. “This underscores our view that Netflix set a sufficiently low bar for Q3 guidance.”

Michael Pachter

Indeed, Pachter believes Netflix “only” lost 150,000 subscribers in North America, significantly below the 400,000-consensus net sub loss. After Netflix’s Oct. 13 announcement that it would launch its ad-supported service in 12 countries on Nov. 3, Pachter now expects Netflix to add 4.85 million subs in the fourth quarter that ends Dec. 31. That’s up from industry consensus of 4.1 million sub additions.

“We think there is upside potential to our initial uptake assumptions, with [average subscription pricing] rising if Netflix adds more new subscribers,” Pachter wrote.

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Through the two previous fiscal quarters, Netflix has lost nearly 1 million net subscribers worldwide. This has sent the streamer’s stock on a downward trajectory from its record highs in 2021.

Pachter expects Netflix to maintain guidance for 2022 free cash flow of roughly $1 billion, with annual positive free cash flow going forward, and substantial free cash flow growth in 2023 compared with 2022. Free cash flow is calculated as operating cash flow less capital expenditures.

Citing an internal survey of 1,200 respondents, Pachter said he believes 15% to 25% of Netflix’s current North American subs (upwards of 18 million) are likely to switch to the less-expensive ad-supported tier. At the same time, the analyst thinks Netflix will add 5 million new subs. As a result, Netflix’s North American market would change from 73 million subs paying an average of $16 monthly to upwards of 62 million subs paying $16 and another 23 million paying $6.99, while also generating $10 per month each in ad revenue.

“By our reckoning, total North American revenue would increase from $1.17 billion per month to $1.3 billion per month through ads,” Pachter wrote.

The analyst said he believes the ad-supported option will significantly impact churn, which currently sits around 33%.

“Since Netflix churn is so high, ad support could trigger the migration of a much higher percentage of customers to the lower priced model,” Pachter wrote.

The streamer reports Q3 fiscal results after the market closes Oct. 18.

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