The streaming landscape was once dominated by Netflix (NFLX 1.73%), which arguably had a monopoly on the entire industry. In recent years, Netflix has seen a rising number of competing streaming platforms, namely from Disney, Alphabet, and niche players like Fubo.
To separate itself from the competition, Netflix has invested aggressively in original content. However, while this approach has reaped some benefits, it's clear that tougher decisions must be made if the company wants to acquire more subscribers and propel its top-line growth.
For several quarters, Netflix executives signaled to investors that it finally planned to crack down on password sharing. While one may argue that this could result in some short-term churn, the overarching thesis is that whatever churn Netflix may experience will be offset by a rising number of subscribers.
While the password-sharing crackdown is in its early days, the initial results are encouraging. Let's dig in and assess whether Netflix is worth considering for your portfolio.
What has Netflix done so far?
Earlier this year, Netflix published a press release stating that over 100 million households worldwide share passwords among accounts. The company's first-quarter 2023 earnings report shows that Netflix has 232 million global paid subscribers. Given these parameters, one can infer that over 40% of Netflix's total paid subscriber base shares passwords with friends and family.
Discerning the total missed opportunity in revenue for Netflix is challenging. For starters, some subscribers are likely sharing their accounts with only one other person, while others may have multiple people who can access their accounts. On top of that, Netflix's pricing varies by geographic region and by account type (with or without ads).
For all these reasons, Netflix has finally formally announced a game plan to combat users sharing passwords. For now, the company's strategy is focused on Canada, New Zealand, Portugal, Spain, and the United States.
Image source: Getty Images.
What does this mean for future business?
Since Netflix announced its password-sharing blueprint, particularly for the United States, several media outlets have referenced a report published by data analytics firm Antenna, which tracks and publishes tech data.
Per Antenna's research, Netflix averaged over 70,000 daily signups for the first few days following its announcement of cracking down on U.S. shared accounts beginning on May 23. In fact, on May 26 and 27, Antenna found that Netflix gained roughly 100,000 subscribers on each of those days immediately following the announcement.
What I found to be a particularly astute observation, is that Antenna's data illustrates that this jump in subscribers is far above what Netflix witnessed in the early days of COVID-19, when the streaming giant enjoyed an influx of new business.
As I alluded to above, quantifying how much revenue Netflix has been missing out on is an exercise in false precision. However, using what we know, it's clear that the company has gained hundreds of thousands of new signups. While some of these will churn out, it's highly likely that many will convert to long-term subscribers. After all, they were watching Netflix's content, albeit for free.
According to a 2020 report from Parks Associates, the average duration of a Netflix subscriber was around 48 months, the highest of its cohorts. If it is assumed that the commitment of each new subscriber from the password crackdown is more than 12 months, Netflix could very well be on its way to generating several billion dollars of net new recurring revenue.
Buy or sell on the news?
Since announcing the U.S. crackdown on May 23, Netflix has seen its market capitalization skyrocket from roughly $160 billion to $200 billion as of the time of this article. It's clear that the stock has some air beneath it, and some momentum traders are likely getting involved.
Despite this run-up in the stock, investors should keep in mind that Netflix will likely continue adding new subscribers leading up to its Q2 earnings in mid-July. Clearly, factors such as inflation have not deterred people from signing up and creating their own accounts, which could be a positive indicator of Netflix's prospects. Moreover, during the earnings call, investors will probably learn just how accretive this new business is. For this reason, I believe Netflix is a solid buy before its earnings report.
With that said, I'd urge investors to keep a long-term outlook. Should Netflix management explain and quantify what these new subscriber numbers translate to in terms of revenue growth, the stock will probably continue moving upward in the short term. Keep in mind that these subscribers have a shelf life, and it's crucial not to be enamored by the initial spike in revenue. Some of these subscribers will churn out permanently or churn and come back when a new season of a favorite show comes on. At a macro level, though, assuming the average duration of a subscriber is several years, as Parks Research suggests, Netflix will enjoy several quarters or boosted revenue from this new customer base, and will be able to use the cash flow from this new business to invest in content and acquire more subscribers.
More importantly, the future cash flow Netflix could generate from the incremental subscriber revenue should not be discounted, especially given how much the streaming companies are forced to invest in new content to differentiate themselves. While the stock seems to be trading higher by the day, investors should be eager to start a position and dollar-cost average as time goes on.
