The day has come. Netflix (NFLX 0.91%) has enacted its password-sharing monetization strategy. Gone are the days of using your parent's or friend's Netflix account for free, as Netflix now requires extra user slots to be purchased for $8 more per month if the viewer doesn't reside in the same household as the main account holder.
But what does this mean for the stock? Should investors pile into Netflix's stock in anticipation of this additional revenue flow? Or is this just a passing story? Let's find out.
There may be a better alternative to password sharing
The effect of Netflix's password-sharing crackdown could be massive. Management estimated more than 100 million households worldwide would be affected by the change. Simple math indicates this could add as much as $9.6 billion annually to Netflix's $31.6 billion revenue stream.
However, it's not as simple as that, as this figure also includes accounts in countries where a subscription may be cheaper. Furthermore, not everyone who currently shares a password will sign up for a shared or individual account.
NASDAQ: NFLX
Key Data Points
But management is confident its overall paid customer base will grow, as that's what happened in Canada -- a country that already has the password-sharing features and that Netflix believes will exhibit similar behavior to the U.S.
It also strategically priced these additional user slots, as they are more expensive ($8 per month) than the standard with ads offering ($7 per month). Management hopes most users switch to an ad-based subscription instead since this offering is doing incredibly well. For Q1, management stated the subscription plus ad revenue from this service exceeded the monthly standard plan's average monthly revenue of $15.49 per user.
Should more users choose to create their own accounts instead of opting for the password-sharing option, Netflix's finances will receive a tremendous boost.
But how would that affect Netflix's stock?
The best-case scenario doesn't add a lot to the stock
The company's lackluster growth is part of the issue with Netflix's stock over the past year. With revenue only increasing by 3.7% in Q1, it's not yet improving. But with the password crackdown adding millions of new subscribers, Netflix could add a lot to its revenue.
As mentioned above, it's unlikely Netflix will convert every one of these households to paying customers. But even if it does, it's only a one-time revenue boost.
After this catalyst is up, Netflix must continue growing its paid memberships. With this number steadily holding in the mid-single-digit range over the past year, there's not a ton of upside left in Netflix's stock.
Should Netflix convert every user and achieve a $41.2 billion annual run rate with a 40% profit margin, calculated from Netflix's current operating expenses with its increased revenue (which should be pure profit), the stock would be valued at 11 times earnings.
Is 11 times earnings a fair price for a company whose profit is growing at a 5% annual pace? I'd say that's not too far off. But, bear in mind, that's assuming every single one of the 100 million households converts and chooses to pay $8 per month. That's highly improbable, and if the best-case scenario doesn't leave much room for further stock price appreciation, then the stock doesn't make a lot of sense to own.
So while the stock may see a bump depending on how the rollout goes, I don't think it changes the long-term trajectory of the business. Because of that, I'll pass on Netflix's stock.
