Netflix share price slides, will password sharing crackdown work?

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A year ago to the day, I put together an analysis of Netflix (Nasdaq: NFLX) following a 35% plunge in the share price. $50 billion was wiped off the company’s market cap that day following a nasty earnings miss for Q1 of 2022. 

The main reason was a loss of 200,000 subscribers, which was far below the expected net add of 2.5 million, and the first time in over a decade that Netflix lost subscribers. It also warned that it expected to lose a further 2 million subscribers in the following quarter. 

The streaming giant has seen its share price expand 43% since. Yesterday, it reported Q1 earnings for 2023. The fallout was certainly less dramatic than last year, but the stock did slide, shedding 3%, despite initially falling 10%. 

Netflix reported subscriber growth of 1.75 million, roughly in line with expectations. The earnings were a small beat, $2.88 per share compared to $2.86 per share expected. But the revenue came in below expectation, $8.16 billion, below the $8.18 million forecasted. 

What is Netflix’s plan for password sharing?

We all know it anecdotally (stop looking at me), but password sharing is a huge drain on Netflix’s revenue. The only problem is, it is tough to police. 

Investors were pleased to know the company planned to roll out measures to ensure multiple people could not use the same Netflix account as easily. The initiative, involving the designation of a primary location for an account, was trialled in four countries (Canada, New Zealand, Portugal and Spain) and had been planned to be launched globally around this time. 

However, the streaming giant said yesterday that this would be delayed an extra quarter. 

“While this means that some of the expected membership growth and revenue benefit will fall in Q3 rather than Q2, we believe this will result in a better outcome from both our members and our business,” the company said on the decision to push out the password policing. 

With 43% of its users estimated (by Netflix itself) to share accounts – that is over 100 million accounts – it is obviously an important move. The big question is whether this can be successfully rolled out without a dip in subscribers. 

Because with rising prices and already such a large subscriber growth, it will be difficult for Netflix to continue adding subscribers. The rate of growth on new signups has slowed significantly from the meteoric early days, as the chart below shows. 

This is hammered home when you assess where the subscriber growth is now coming from. Last quarter, 80% of new signups came outside of the US and Europe. This sounds like an optimistic point, but I’m not so sure. The fact is that Netflix needs to start shifting to revenue rather than signups because there is not much more it can do for the latter. 

And that is what it is doing. Netflix believes the password-sharing initiative will ultimately increase revenue for the company, as even if subscribers cancel, the extra revenue scooped from the designation of sub-accounts will be greater than the portion lost through cancellations. 

Can Netflix succeed in increasing revenue?

Whether the company will be successful or not is another matter. 

So far, company leadership has painted a bullish tone. The below note on Canada, which is one of the four countries trialling the password sharing programme, stuck out to me:

In Canada, which we believe is a reliable predictor for the US, our paid membership base is now larger than prior to the launch of paid sharing and revenue growth has accelerated and is now growing faster than in the US. 

That is a tremendous vote of confidence in future plans. Nonetheless, it will still be difficult once the rollout is pushed into the US and the rest of Europe. 

There is also the old-fashioned factor of competition to discuss. In the last few years, Netflix’s total monopoly on the streaming space has dissipated, and consumers now have many options. Disney+, Hulu, HBO Max and so on are all fighting for eyeballs and, more importantly, customer dollars. 

This has clearly impacted the company, too. The stock has lagged the Nasdaq badly, even in a year that has seen the tech sector crushed. 

The tech giant is currently trading at a share price of $323, translating to a market cap of $144 billion. That is up 43% from last year, following that gruesome 35% plunge after the earnings disaster, when it slumped to a $100 billion valuation. 

Taking a step back and assessing the company’s prospects amid this environment of increased competition, as inflation squeezes the disposable incomes of couch-sitters around the globe, $144 billion doesn’t feel cheap. 

The narrative of a mushrooming subscriber count is gone, meaning that old elusive concept in the tech world, profit, is that much harder to grow. Netflix is swinging for the fences with the password crackdown, and the results could be pivotal for it over the next couple of quarters. 

In an economy which is still governed by tight monetary policy, any tech stock is a risk. Netflix is certainly no exception. 

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