Variety; Netflix Q3 Preview: Price Increases Could Be Coming Soon, Analysts Suggest

Story from Variety:

Netflix is expected to post solid results for the third quarter of 2024 — but with subscriber gains from its password sharing crackdown now tapering off, some Wall Streeters believe price hikes are on the near-term horizon.

The company is scheduled to release Q3 2024 earnings Thursday, Oct. 17, following the market’s close at 4 p.m. ET.

Netflix previously forecast Q3 global average revenue per member (which Netflix calls “ARM”) to be “roughly flat year over year” on a reported basis because of ongoing foreign-exchange “headwinds” as well as “plan and country mix.” That has prompted analysts to speculate that the streamer will have to punch the pricing-power button in order to sustain its double-digit revenue trajectory.

With this week’s earnings report, there’s “the potential for a major price increase announcement, including the U.S.,” New Street Research analyst Dan Salmon wrote in an Oct. 15 note. Netflix’s last major price increase in the U.S. was announced in October 2023, but only on Premium and Basic tiers — leaving prices of the ad-supported plan ($6.99/month) and Standard plans ($15.49/month) unchanged.

That “partially helped differentiate the lower price point of the ads plan as initial adoption was ramping,” Salmon noted. The next price hikes in the U.S., Netflix’s largest market, “could potentially be broader-based,” he wrote.

The ad-free versions of Disney’s Hulu ($18.99/month as of Oct. 17) and Warner Bros. Discovery’s Max ($16.99/month as of this June) are more expensive than Netflix’s Standard plan, and “we think Netflix boasts strong pricing power given it has not raised price on the Standard tier since January 2022,” Macquarie Equity Research analysts Tim Nollen and Ross Compton wrote in a Q3 media and tech earnings preview released last week.

Morgan Stanley analyst Benjamin Swinburne also anticipates Netflix making “continued price increases” on premium (no-ads) plans to drive up average revenue per member. For 2025, the firm forecasts global ARM growth of 4% on “mid-single digit growth on ad-free subscribers as continued price increases help offset downward pressure from regional mix shift.” Overall, Morgan Stanley estimates Netflix topline growth of 13% in 2025.

On the company’s Q2 earnings call in July, co-CEO Greg Peters discussed how Netflix thinks about price increases, providing commentary consistent with how he’s previously addressed the topic.

In general, Peters said, “It’s our job to increase the value that we are delivering all of our members. We’ve got more amazing film, more series, the live events that are coming, more games. And when we have signals from our members, this is the amount of acquisition that we’ve got going on, engagement, what our retention and churn looks like, then we find the right moment to ask our members to pay a bit more to keep that flywheel spinning.”

For Q3, Wall Street analysts on average expect Netflix to report 4.76 million net new paid subscribers, including a gain of about 1 million in the U.S./Canada region, according to Zacks Investment Research.

Netflix previously told investors it expects paid net additions for Q3 to be lower than the year-earlier period — when it netted 8.76 million new subscribers — which “had the first full quarter impact from paid sharing.” That’s a reference to Netflix’s crackdown on illicit password sharing via its program to convert freeloaders to paid members, which has produced a lift in net adds (and prompted rivals like Disney and Warner Bros. Discovery to follow suit).

Still, some financial analysts see paid sharing continuing to drive upside for the streamer. Netflix is “now lapping its password crackdown, but we continue to see benefit from it in our survey results, while its advertising tier should reap benefits for several years,” Wedbush Securities analyst Alicia Reese wrote in a note published Tuesday.

To date, the most significant benefit of Netflix’s ad tier is that it limits churn (i.e., subscriber cancelations), Reese wrote. “We think Netflix is positioned to accelerate ad-tier revenue contribution into year-end and 2025 as it improves its advertising solutions and targeting, utilizes new partnerships, and adds more live events” such as the pair of NFL games on Christmas Day 2024 and WWE’s “Monday Night Raw” in 2025 and beyond, per her note.

On the financial front, analyst consensus estimates are for Q3 revenue of $9.77 billion (which would be year-over-year increase of 14%) and earnings per share of $5.11 (versus $3.73 a year ago), per LSEG Data & Analytics. Netflix’s Q3 guidance was for revenue of $9.727 billion and EPS of $5.10. Netflix forecast operating margin coming in at 28.1%, up from 22.4% in the third quarter of 2023.

Overall, Wedbush’s Reese expects Netflix to meet expectations in Q3 and “set strong guidance” for the year-end 2024 quarter. As such, the firm raised its price target on the stock from $725 to $775/share, reflecting a price-to-earnings multiple of 29X for its EPS estimate for 2026. “We think Netflix can meet expectations for EPS to more than double between 2023-2026, supporting its premium valuation,” Reese wrote.

Meanwhile, it’s worth noting that Netflix is going to stop reported a key metric — subscriber counts — starting in 2025. As of the first quarter of next year, Netflix says it will no longer report member numbers on a regular basis; according to the company, other metrics like engagement and profitability better reflect its overall health.

The move, though, has raised questions about “how much longer the password-sharing crackdown” and the ad-supported tier can “contribute to member growth,” New Street’s Salmon wrote. Netflix investors have “typically been highly sensitive to member numbers over the years, and we may see amplified focus on the exit trends as it goes away,” according to Salmon.

Investors “remain focused on paid member trends and monetization efforts,” TD Cowen’s John Blackledge wrote in an Oct. 7 note, saying the firm expects to see continued strong member growth and rising margins in Q3.

The analyst cited TD Cowen’s September 2024 survey showing Netflix continued to hold the No. 1 spot as U.S. consumers’ most popular choice for “living-room viewership,” with 23% of respondents picking Netflix, followed by YouTube (15%) and basic cable (12%). “We think Netflix’s broad catalog across multiple genres creates a durable advantage over time,” Blackledge opined.