March 28, 2024

Wedbush Securities Vice President of Equity Research Alicia Reese joins Yahoo Finance to give insight into why Wedbush removed Netflix from the “Best Ideas” list, yet remains bullish on the stock.

SEANA SMITH: Netflix is a big winner in the first quarter of the year, tracking gains of more than 20% and outperforming five of the seven members of the Magnificent Seven. Well, Wall Street is bullish on Netflix with 2/3s of analysts rating the stock a buy. Our next guest has been one of the most bullish price targets on the street and is nevertheless removing the streamer from a list of best ideas. Here with more, the analyst behind that call is Alicia Reece Wedbush Securities Vice President of Equity Research. It’s great to see you here.

So removing Netflix from the best ideas list, Do you still though, it sounds like, see upside for Netflix? And what does that look like?

ALICIA REESE: Yeah. So, you know, we did– we raised our target even more. We’re still very bullish on the stock. We just don’t expect the same outsized growth in the shares that we saw over 2023. I think what we’re going to see is a shift to some extent from subscriber growth in 2023 that was really outsized, some– a lot of that driven by the password sharing crackdown and the ad tier as it’s limited churn. We think the ad tier will continue to limit churn over 2024 and beyond, but it’ll also start too in the back half of the year and certainly into 2025 contribute to ARPPU.

And I think the story shifts from a subscriber growth story domestically to an ARPPU growth story domestically that, you know, subscriber growth should still, you know, maintain some really nice– you know, a buffer from the International growth still. So we’re still quite outperform on the stock. We just don’t see the stock doubling again in 2024.

BRAD SMITH: Yeah. You mentioned international. What levers do you expect Netflix to try and pull on the back half of this year at least, well, in the next three quarters of this year? My goodness, I’m just trying to, you know, speed past the second quarter. But anyway, as we think about the rest of this year, What levers can they pull internationally?

ALICIA REESE: Well, they– I think they have still, you know– our survey that we did recently said that about 6% of at least domestic Netflix subscribers are still sharing their password and have not yet been cracked down on. And so I don’t think Netflix is going to do that all at once. I don’t think you’re going to see that in one single quarter. They’re trickling that in because it’s adding, you know, a nice buffer for new subscriber additions for those who get kicked off and also for families who choose the extra member feature, and that’s a nice boost to ARPPU.

So I think we’ll continue to see that just in, you know, diminishing rate that we saw in 2023. There’s also the ad tier. The ad tier is nearing accretion so that incremental ARPPU that you get from the ad tier, it’s– you know, it hasn’t, you know, added anything to ARPPU yet. It’s reaching parity. I think it will– In the back half, it’ll start becoming accretive, and then in 2025, it’ll be more meaningfully accretive, and that can grow pretty substantially beyond 2025. So it’s still a really interesting story here, and there’s quite a bit of growth in all aspects. And then, like you said, the international, that, you know, just growing the subscriber base.

I think there’s not as much room in India, but certainly plenty of room left in Latin America and APAC.

SEANA SMITH: And what’s that going to do to Netflix’s bottom line do you think, Alicia?

ALICIA REESE: Yeah. So the ad tier accretion, that drives revenue, that drives earnings, that drives free cash flow. So that’s a hugely positive story. You know, consensus is calling for a doubling of EPS from 23 to 25, or 26. And we think that’s absolutely reasonable. A lot of that is just coming from, you know, the extra member feature being entirely incremental revenue, and then, you know, the accretion from the ad tier being entirely incremental revenue and at a very high margin.

You know, they’re not spending, you know, terribly much on that. And as they add more sports and more sports-like content, like the WWE, that’ll give them a lot more opportunity to advertise and not just on the ad tier, on the, you know, premium tiers as well.