March 9, 2022
On Wall Street, few analysts have been as bearish about Netflix over the years than Michael Pachter, analyst with Wedbush Securities in Los Angeles. When the market reaped praise upon the SVOD behemoth, Pachter was sure to find fault. His was often the lone voice of dissent against a stampede of bulls.
That outlook changed slightly on March 9 when Pachter upgraded Netflix’s stock from “underperform” to “neutral”. Pachter’s revised outlook represents in part a victory lap as Netflix shares have plummeted from a high of $691 in mid-November to Pachter’s longtime price target of $342 on March 8.
To read the analyst’s note, however, is to remain grounded with the reality that even an unexpected outlook reversal on Netflix’s share price is still embraced with tough love.
Specifically, Pachter contends Netflix’s recent price hike for the streamer’s 75 million North American subscribers underscored both market saturation and continued price inelasticity — a dominance, Pachter believes, few SVOD competitors have.
“The fact that Netflix raised prices across the board in [North America], on only 4,000 subscribers in [Europe, Middle East and Africa] and not at all in the rest of the world suggests that the company expects the vast majority of its future subscriber growth to come from Latin America and Asia Pacific region,” Pachter wrote.
The analyst believes Netflix is “soaking” its highest revenue subscribers in North America to fund future growth overseas. At the same time, Pachter believes the streamer’s pioneering strategy releasing an entire season’s worth of episodes on its debut reflects a flaw in Netflix’s business model.
“The flaw with this model is that it allows the consumption of new content at the subscriber’s own pace, rather than forcing a subscriber to remain with the service for 10 weeks as content is released one episode at a time (as is the case with virtually all of Netflix’s competitors),” Pachter wrote.
The knowledge that Netflix will dump all episodes at once gives the fickle customer an advantage, as subscribers can quit and rejoin without penalty as often as they wish, according to Pachter.
“Theoretically, a subscriber who watches only a handful of Netflix originals can join for six months and quit for six months, and if this becomes the norm, churn will increase and net subscriber additions will slow to a crawl,” he wrote.
Pachter suggests that as Netflix targets below median income households as potential subscribers, continuing to release entire seasons of original programming will see these subscribers more likely to churn, driving net subscriber additions ever lower.
At the same time, Pachter contends Netflix offers its subscribers a compelling value proposition for $15.49 per month, and he believes the streamer the has pricing leverage, with the ability to raise prices as high as $19.99 per month with few subscriber defections.
That reality is helping drive what Pachter suggests is Netflix’s $1 billion of annual free cash flow growth each year through 2030 — a rosy outlook even the most bearish analyst can love.
“We believe Netflix investors are beginning to appreciate Netflix’s future status as a low growth, extremely profitable enterprise,” Pachter wrote.