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 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: 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.

GameStop Opens Lower Following Mixed Financials

The day after world’s largest video game retailer GameStop posted mixed second-quarter (ended July 30) financial results, company shares trended down during early Sept. 9 trading.

Despite a retail footprint of thousands of stores, GameStop rebooted its senior management team, incorporating a team of e-commerce experts led by new chairman Ryan Cohen, founder of Chewy.com. The company is in the process of transitioning from physical retail to technology and online gaming.

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Cohen & Co.’s ascendancy has been fueled in part by crowdsourced-investors looking to manipulate GameStop shares for short-term gains. The strategy has worked thus far, with shares up 860% year-to-date based largely on non-business fundamentals. Quarterly revenue topped $1.18 billion, above an industry estimate of $1.12 billion.

Regardless, GameStop management conducted no Q&A during its Sept. 8 fiscal call — the second consecutive fiscal period it has done so.

As a result, much of the established Wall Street investment community has abandoned GameStop, except Wedbush Securities game expert Michael Pachter. The analyst questions when Cohen will live up to his hype.

“I am waiting for his brilliant strategy, and it’s not going to be brilliant,” Pachter told Yahoo Finance. “If it was brilliant, then he would have let us know, months and months and months ago. [Cohen] is trying to revolutionize an industry that has already passed him by. He’s audacious, and he’s wrong on this one.”

Analyst: 2021 Box Office Trending Up From 2020, Down From 2019

The recent domestic box office success of Paramount Pictures’ A Quiet Place Part II and Universal Pictures’ F9: The Fast Saga has jumpstarted the exhibition business, with theater operators on track to see 2021 revenue increase 120% from pandemic-addled 2020, according to media analyst Michael Pachter.

Year-to-date revenue has topped $1 billion, which is down about 41% from 2020, but the gap is expected to close and ultimately surpass last year’s tally as the year progresses with the debut of Disney/Marvel Studios’ Black Widow, among others.

Michael Pachter

The Wedbush Securities analyst, in a June 29 note, said the current month’s box office receipts of $368 million represent “a vast improvement” from the $4 million in ticket sales North American theaters mustered during June 2020.

Pacter said that while the vaccine rollout and a steady stream of summer blockbuster movies portends a strong industry rebound, the month’s revenue is still 68% below June 2019 box office receipts — underscoring the long path toward normalization theaters face.

Then again, the 2019 box office was an outlier as Disney alone generated a record $13.2 billion in revenue on the back of its expansive Marvel/Lucasfilm/Pixar IP portfolio.

“We expect [publicly traded exhibitor] shares to mostly trade higher this week after a reassuringly strong opening weekend for F9,” Pachter wrote. “While there was some additional release slate movement by Warner Bros. late last week, this appeared to be typical shifting to maximize profitability against competing releases, and not related to studio concerns about attendance trends.”

Warner last week pushed back again the release of big-budget sci-fi movie Dune to Oct. 22 from Sept. 22. The studio moved up to Sept. 17 Clint Eastwood’s Cry Macho, while “The Sopranos” prequel, The Many Saints of Newark, now fills the Oct. 1 slot.

Pachter cautioned that the exhibition business remains volatile dealing with merger and acquisition scuttlebutt, COVID variants gaining steam, and competing streaming services.

“There is plenty of theatrical content originally slated for 2020 to fill the 2021 release slate and spill over into 2022,” Pachter wrote. “However, streaming services are competing at the highest levels for content to bolster their offerings in an extremely competitive environment as content was consumed at heightened levels throughout 2020. [This trend] has continued through the first half of 2021.”

Analyst: Netflix Paying Sony $1 Billion For Movie Rights

Netflix’s big distribution deal with Sony Pictures for exclusive streaming access to new theatrical and original-produced movies beginning in 2022 is expected to cost the SVOD behemoth more than $1 billion, according to media analyst Michael Pachter. Netflix and Sony did not disclose financial details of their landmark agreement, which supplants Sony’s long-time distributor (since 2006) Starz.

“This is meaningful for Netflix as many of its earlier exclusive licensing deals have expired, the content pulled back by studios such as Disney and WarnerMedia seeking to shore up their competing streaming services,” Pachter wrote in an April 12 note.

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The agreement comes as other studios pull content from Netflix for proprietary services. MGM-owned Epix and MGM have opted for an exclusive partnership with Paramount+, while NBCUniversal is considering pulling content from both HBO Max and Netflix to shore up its Peacock service, while potentially leaving some of its content available to co-owned Hulu on a non-exclusive basis.

“While these are clearly exceptional times and exhibitors are willing to negotiate terms they typically would not have in a pre-COVID environment, we think these types of negotiations will continue, and we expect to see more original content from streamers playing in theaters post-pandemic,” Pachter wrote. “We think exhibitors are now more willing to negotiate favorable terms with far more flexible windows than they had in the past, as long as their counterpart is willing to pay.”

Indeed, the analyst contends Netflix acted proactively as studios continue to hold back major tentpole titles due to the pandemic. With many lower-budget movies slated for release last year shifted to streaming to recoup production budgets, most larger budget titles have been pushed back to later this year or into 2022. Despite the expected July 9 theatrical bow of Disney/Marvel’s Black Widow, and exhibitors in some markets, including Los Angeles, expanding seating capacity to 50% from 25%, Pachter says the exhibition industry is not expected to “normalize” until this summer at the earliest as more moviegoers get vaccinated.

“Attendance levels will not materially improve until tentpole titles return to theaters, and studios clearly prefer the lower risk of releasing tent-pole titles when vaccine s should be widely distributed in the U.S. and Europe,” wrote the analyst.

Analyst Predicts 1 Million Fewer New Q4 Netflix Subscribers

Netflix is projecting subscriber growth of six million for the fiscal period ended Dec. 31, 2020 — topping 201 million subs worldwide. Michael Pachter, media analyst with Wedbush Securities in Los Angeles, said he believes that tally will come in about 1 million less at 5 million, including 300,000 in North America, largely due to recent price hikes.

“We think this is likely given the price increase implemented in late October … [where] standard monthly subscription fees went to $14 from $13 and premium fees went to $18 from $16,” Pachter wrote in a Jan. 14 note. The analyst contends the price hike will up revenue to $6.6 billion from guidance of $6.57 billion.

The longtime Netflix bear notably marveled at Netflix’s ability to keep the content pipeline fresh during the pandemic when most production in Hollywood was shut down. Specifically, Pachter cites Netflix adding foreign content across markets, cross-promoting new genres to audiences, and purchasing/reviving dormant franchises such as “The Karate Kid” (“Cobra Kai”) and “Full House” (“Fuller House”), among others.

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“Netflix’s experience in adapting foreign content to new markets has resulted in the company maintaining its content quantity lead over its competitors,” Pachter wrote. “We expect that lead to be sustained for the foreseeable future.”

If there was a silver lining during the pandemic, shuttered content production accelerated Netflix’s path to generating positive free cash flow — long a sore spot for Pachter. Free cash flow typically represents the cash a company generates after accounting for fiscal outflows to support operations and maintain capital assets. Pachter is guiding $2 billion free cash flow in fiscal 2020.

But the flush FCF could be quickly erased after Netflix announced production/distribution of more than 70 original movies in 2021 — enough content to release at least one new original movie every week.

“This is an ambitious and costly goal, particularly as the service is touting its ‘A’-List-driven content,” Pachter wrote. As a result, the analyst expects Netflix to reach break-even by fiscal year 2022 as content consumption normalizes, subscribers grow and content spend again ramps higher.

Netflix reports Q4 results at market close on Jan. 19.