Analyst: Netflix Q2 Sub Loss Might Not Be as Big as Everyone Thinks

Netflix has projected it expects to report a net loss of 2 million global subscribers for the fiscal period ended June 30. The sub loss comes on top of a 200,000 net loss in Q1, which resulted in the streamer’s stock price plummeting 70%.

Michael Pachter, media analyst with Wedbush Securities in Los Angeles, doesn’t think the projected Q2 sub loss will be so high.

Why?

The streaming behemoth has riding high on the success of “Stranger Things,” and specifically the staggered release of season four — which has topped viewing charts industrywide.

“While it is possible that the company will once again issue downbeat guidance for Q3, we think that the staggered release dates limited churn at quarter end and once again, Netflix is likely positioned to grow,” Pachter write in a note.

Netflix co-CEO and chief content officer Ted Sarandos turned the industry on its ear in 2013 when the streamer began releasing all episodes of an original season on its debut. Access to all episodes quickly led to the social phenomenon known as binge viewing.

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But as the SVOD market has become saturated and services raise prices, the appeal of binge viewing has also increased subscriber churn, or members not renewing their monthly subscriptions.

So Netflix, like other platforms, has begun to stagger the release of episodes on original programming, most notably award-winning “Stranger Things” and “Ozark.”

Specifically, Pachter believes Netflix saw a global net streaming loss of 1.5 million subscribers (total subs to 220.14 million), as Netflix drove incremental viewership with Stranger Things 4 and likely limited churn by splitting up the content dumps between Q2 and Q3. Given the strong viewership over the course of Q2, the analyst contends subscriber numbers will beat low expectations set by management.

“We think that the sooner the company shows its commitment to reducing churn by releasing its new content over several weeks, investors will see an uptick in net new subscribers and investor confidence in the Netflix business model will be restored,” Pachter wrote.

Netflix reports Q2 fiscal results July 19 after the market close.

Analyst: Netflix Stopping Entire Season Episode Drops Could Curb Subscriber Churn

Netflix recent move to cut new seasons of “Ozark” and “Stranger Things” into half-season premieres, should help the subscription streaming video behemoth reduce churn and sustain its subscriber base, according to Wedbush Securities media analyst Michael Pachter.

In a May 16 note, Los Angeles-based Pachter said halting the pioneering practice of dropping all episodes of an original series on the show’s premiere — a longtime Netflix hallmark — would incentivize subscribers to stick around the service.

Michael Pachter

“We think that the sooner the company shows its commitment to reducing churn by releasing new content over several weeks, investors will see an uptick in subscribers and their confidence in the Netflix business model will be restored,” Pachter wrote.

The analyst contends much of Netflix subscriber growth woes revolve around the saturation of the North American market, which includes the streamer’s first foreign expansion. Specifically, Pachter lauds Netflix’s decision to clamp down on password sharing, which he believes affects 30 million North American subscribers and 100 million globally.

Pachter doesn’t believe Netflix will add more than a few million new customers by charging subscribers who share passwords an additional $2 monthly fee. He thinks the streamer’s plan to adopt an ad-supported subscription option has great potential to drive significant revenue.

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“That said, it could also cannibalize existing customers,” Pachter wrote. “On balance, we think ad-supported subscriptions is a good idea, particularly as a disincentive to churn.”

The analyst added that by raising prices in mature markets, Netflix could drive up its average-revenue-per-user and its level of profitability, allowing the streamer to reinvest profits to continue growing in Latin America and Asia-Pacific markets.

“We are taking [Netflix’s] recent share price weakness as an opportunity to raise our investment recommendation to ‘outperform’ from ‘neutral,'” he wrote. Pachter’s share price target remains at $280. Netflix shares are currently trading around $188 per share.

“We do not believe that Netflix’s share price will approach 2021 levels for many years but think that our price target is achievable within the next 12 months,” Pachter wrote.

Analyst: Chicken Soup Saved Redbox

Redbox Entertainment shares may have fallen 35% in value May 11 since the legacy DVD kiosk vendor announced it would be acquired by Chicken Soup for the Soul Entertainment, operator of the Crackle Plus ad-supported streaming video service, for $375 million in stock.

But Redbox’s digital businesses faced an uncertain future without the fiscal lifeline thrown by Chicken Soup, according to Los Angeles-based Wedbush Securities media analyst Michael Pachter, who says the transaction values Redbox shares around 65 cents per share.

Michael Pachter

Redbox shares, which closed May 10 at $5.60 per share, are now trading at $3.58 in heavy trading.

Pachter believes that despite Crackle Plus being better established within the AVOD market, Redbox’s brand name carries more recognition among consumers. The analyst believes Chicken Soup will be able to meld the streaming service within Redbox TV, in addition to bringing greater resources to digital distribution in a market swamped with big-spending AVOD competitors such as Fox Corp.’s Tubi and Paramount Global’s Pluto TV.

“Redbox’s post-IPO performance did not inspire confidence for its long-term potential, and the company faced bankruptcy without a significant cash infusion,” Pachter wrote in a note. “Had [Chicken Soup] not stepped in… it is unclear how long Redbox would be able to fund its own digital expansion, which is key to its viability as a public company.”

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Analyst: Netflix’s Pain Could be Redbox’s Gain

Redbox Entertainment could be seeing a gain from the fiscal pain Netflix has experienced this week since reporting a first-quarter net loss of 200,000 subscribers. The SVOD pioneer’s stock price has cratered almost 40% since April 19 when it said it expects to lose 2 million subs in the current quarter ending June 30.

At the same time, Redbox has seen its shares skyrocket in value more than 25%, despite posting a loss of more than $140 million in 2021.

Michael Pachter

That could be because Netflix disclosed it was considering launching a lower-priced ad-supported subscription plan — a significant move considering co-founder Reed Hastings’ long aversion to advertising.

Redbox, of course, has made major strides launching digital distribution of content across both transactional and ad-supported streaming platforms. The company generated more than $35 million in digital revenue last year.

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With studios launching higher profile titles in theaters, trickle down to Redbox kiosks, transactional VOD and possibly AVOD portend near-term positives, according to Michael Pachter, analyst with Wedbush Securities in Los Angeles.

“[Their] movie lineup is really good, and they have advertising, so maybe Netflix’s foray into [ad-supported streaming] is an endorsement,” Pachter wrote in an email.

Analyst: Netflix Price Hikes to Offset Slowing Subscriber Growth

Netflix’s subscription price hike last month, the service’s third since 2019, should insulate the SVOD behemoth against slowing subscriber growth in North America and beyond. So says longtime Netflix bear analyst Michael Pachter with Wedbush Securities in Los Angeles.

Pachter, who has a “neutral” rating on Netflix shares, believes that as sub growth continues to cool, any marginal sub gains will occur in less developed regions worldwide at lower subscription prices.

Michael Pachter

The analyst contends the streamer will add 2.5 million subs worldwide in the first quarter (ended March 31) to up its global membership base past 224 million, in line with company guidance. Pachter said he believes any sub gain was likely offset in part by the elimination of all Netflix users in Russia due to the ongoing war in neighboring Ukraine.

The analyst believes Netflix added 400,000 subs in North America, with revenue in the region boosted by price increases. The service added 750,000 net subs in Europe, Middle East and Africa (EMEA), with price increases in the quarter likely offset by unfavorable currency headwinds. Another 300,000 net sub adds in Latin America, with lower average-revenue-per-user (ARPU) due to currency headwinds. Finally, Pachter says Netlfix added more than 1 million net subs in the Asia Pacific region, driven in part by lowered price in India that likely drove user growth in the quarter.

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“Netflix’s first-mover advantage and large subscriber base provides the company with a nearly insurmountable competitive advantage over its streaming peers,” Pachter wrote in an April 14 note. “Subscription price increases in the west should fuel additional content production and growth in other regions, and our bias is that cash flow will turn positive in 2022 and beyond, as management has guided.”

Netflix reports Q1 fiscal results after the market close on April 19.

Analyst: Concerns About Moviegoers Not Returning to the Theater Are Overblown

As the theatrical movie business slowly emerges from the pandemic, concerns about any permanent damage the COVID-19 virus have wrought on the moviegoing public are overblown, according to Wedbush Securities media analyst Michael Pachter.

Michael Pachter

Writing in an April 5 note, Pachter said the North American first-quarter (ended March 31) box office ended up 465% at $1.34 billion in revenue, compared with $288.1 million in the previous-year period when most exhibitors either remained closed or operated at reduced capacity. The current year Q1 was still down 44% relative to Q1 2019 at $2.39 billion, due to the relatively slight release slate.

“We are notably more positive as the volume of the release slate normalizes and the quality of releases improves notably,” Pachter wrote. “Barring any significant resurgence of COVID, we expect attendance to begin normalizing in the coming weeks and months.”

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That said, Pachter does not expect the domestic box office to return to its former glory in 2022.

“We are conservatively estimating 2022 domestic box office up 46% over 2021 (down 43% over 2019), and 2023 box office up 32% over 2022 (down 24% over 2019),” Pachter wrote.

The analyst, citing an internal survey of more than 1,000 moviegoers, found that the share of people not planning to return to the theater this year is smaller than feared, and is still driven in part by ongoing pandemic-related fears.

Of the survey respondents who had gone to the movies at least one to two times per year before the pandemic, fewer than 20% said they do not plan to attend the movie theater in 2022.

“Overall, we view this result as relatively benign given ongoing concerns related to the pandemic (the top reason cited for not attending movie theatres in 2021, and still a significant concern among respondents), a shift in behavior over a two-year period of watching content at home, the plethora of quality content now available on a variety of streaming services, and inflationary pressure,” Pachter wrote.

The analyst contends studios have myriad opportunities to close the gap on overall box office revenue by continuing to market blockbusters more heavily with Imax and other premium large format screens, as well as with alternative content, such as live concerts, comedy shows, and sporting events.

“Based on our survey results, we think that interest in alternative content digitally broadcast to movie screens is substantial and can drive incremental attendance,” Pachter wrote.

Wedbush Analyst Raises Netflix Guidance, Offers Tough Love

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.

Michael Pachter

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.

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“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.

Analyst on Redbox: ‘There is Value There’

NEWS ANALYSIS — As Redbox Entertainment’s share price continues to fall, scuttlebutt would suggest the future is cloudy for the venerable home entertainment distributor. But a prominent Wall Street analyst thinks otherwise.

Redbox early last month revealed that its yet undisclosed financial results had been undermined more than expected by the lack of new movie releases in 2021. The company, like much of the home entertainment industry, saw an uptick during the early days of the pandemic as homebound consumers sought alternative entertainment options.

The Redbox kiosk has always been the most cost-effective way to rent a new-release DVD/Blu-ray Disc movie. Those same titles are also available earlier to rent or buy digitally on the Redbox platform — at higher prices.

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Michael Pachter

To help fill the void, Redbox has upped marketing spend while acquiring mostly digital (ad-supported streaming) distribution rights to indie movies — all strategies that requires capital at the same Redbox’s market cap declines.

Then Redbox disclosed this: “On Jan. 28, 2022, Redbox borrowed the remaining availability under its revolving credit facility. Redbox’s primary sources of liquidity are cash on hand, cash flow generated from operations, and amounts available under its revolving credit facility. Management is actively taking steps to decrease monthly costs, delay capital expenditures, and increase revenues. Redbox is also evaluating a variety of strategic alternatives.”

A sobering statement, indeed, but not the end, according to Wedbush Securities analyst Michael Pachter, who contends that many of Redbox’s 39 million loyalty customers are indeed late adopters to over-the-top video consumption.

“Yes, many are Netflix customers, but most still like movies and may not have enough money to subscribe to multiple services,” Pachter wrote in an email.

He suggests that Redbox has a strategy that the late adopter will like “free” ad-supported TV (the same thinking Roku applies to The Roku Channel) and that they will be able to convert a meaningful percentage of their loyalty members via promotion.

“There is value there, they have just not done a great job of execution,” Pachter said.

Analyst: DVD Rentals Will Drive Redbox’s Digital Transformation

Redbox’s move toward ad-supported VOD, free ad-supported streaming TV (FAST), and transactional VOD is enough to convince Wedbush Securities media analyst Michael Pachter to begin following the stock.

Redbox is in the midst of a reboot, transforming itself from a kiosk disc rental retailer to a multiplatform entertainment distributor. It’s a similar strategy to the one that erstwhile by-mail DVD rental pioneer Netflix employed 14 years ago in transitioning from physical media rentals to subscription streaming.

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Michael Pachter

While much of Wall Street turned its back on packaged media years ago, Pachter contends Redbox’s legacy kiosk business will continue to be a driver of the company’s revenue and digital aspirations. In fact, the analyst believes Redbox only needs to convert from 10% to 15% of its 40 million existing DVD customers to digital to reach more than $1 billion in annual revenue.

Specifically, Pachter contends Redbox’s user base consists primarily of value-conscious customers with inadequate access or disposable income to allow them to stock up on multiple SVOD services. With Redbox pushing free ad-supported streaming, is base users are more likely to recognize the brand and become consumers of advertising on the Redbox channel.

“All the while, these customers are likely to remain loyal to the Redbox [DVD] brand, and we expect the company to capture a reasonable share of consumption of its AVOD and VOD service offering,” Pachter wrote in a note.

For 2023, Redbox is guiding to total revenue of $1.1 billion, with 66% of revenue coming from DVD rentals and the remaining 33% of revenue coming from the growing digital segment. That compares with second-half 2021 projections with 89% of revenue coming from DVD, and 11% from AVOD.

“Redbox’s 39 million loyalty members can [be leveraged] to market digital products…and Redbox makes the transition from disc simple and in-expensive,” Pachter wrote.

Analyst: Black Friday No Longer a Single-Day Event

With one initial report (Adobe) suggesting the Black Friday retail weekend saw a slowdown in total sales, official data across the long holiday weekend remains forthcoming.

One analyst contends the annual post-Thanksgiving event has expanded beyond a few days to encompass weeks, before and after the third Thursday in November. Wedbush Securities analyst Michael Pachter made a return to in-store surveillance following last year’s pandemic and found consumers increasingly shop online while still frequenting stores.

Indeed, the Black Friday weekend concludes following today’s Cyber Monday event, so coined by the National Retail Federation in 2005 as a way of promoting e-commerce. The day has now become an industry record-setter. Last year’s Cyber Monday (Nov. 30, 2020) was the biggest online shopping day in U.S. history with more than $10.7 billion spent on e-commerce. 

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“Consumers still come out on Black Friday, but they are increasingly
shopping online, particularly for consumer electronics,” Pachter wrote in a Nov. 29 note.

That said, Pachter and his team still found value assessing inventory levels ahead of Black Friday at retail, while continuing to track the depth of Black Friday deals vs. prior years both online and in stores.

Best Buy, the nation’s largest consumer electronics retail store chain, took precautions against supply chain issues to keep stores well-stocked with video games, connected TVs, and streaming media devices heading into Black Friday, according to Pachter.

“We were surprised at the how little appeared to have sold through
at big box retailers within gaming and PC peripherals this year,” he wrote.

The analyst contends that as consumers increasingly shop online, retail store inventories of select CE items remained slim compared to previous years.

“Sellthrough appeared strong for CTVs and Roku players,” Pachter wrote. “In the stores we checked, Roku players were in high demand, particularly the lower-end models and particularly the discounted 4K streaming stick.”

Roku sells its players at a steep discount in order to drive user growth, especially on its platform and The Roku Channel ad-supported streaming service. Indeed, the company marketed a $15 streaming device on Black Friday.

“We think the pandemic era accelerated direct-to-consumer selling,” Pachter wrote. “Our covered companies are all in the early stages of this, but may benefit as the gross margin upside from direct sales offsets some of the pressure from higher shipping costs this year.”