It's Easy To See Why Netflix Has A 20% Growth Potential

In the wake of Netflix's ongoing crackdown on password sharing, Wells Fargo expects Netflix to see an improvement in earnings and a rise in stock prices.

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It was announced last month that the streaming giant would charge extra for extra users in Canada, New Zealand, Spain, and Portugal, extending a policy that had been established in Latin America the previous year. It was reported that Wells Fargo analyst Steven Cahall said that the recent fees were “significantly higher” than those in Latin America.

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In a previous statement, Netflix said it would introduce password-sharing fees to a wider audience by the first quarter of next year. Before rolling out the plan to other areas, Cahall said the company would likely assess performance in those regions that already have it in place. He pointed specifically to Western Europe and the United States — where the company generates the majority of its revenue.

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A note to clients on Wednesday said that it is hard to determine exactly what will be incremental to expectations because, like us, most models incorporate a non-discrete benefit from paid sharing into net adds, revenue, profitability, and cash. Despite this, we remain optimistic that the number of paying users will increase over time as paid sharing becomes more understood, but it is difficult to predict how much.

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This year's outperformance of the stock is likely to be boosted by the company's comments in the first quarter regarding paid password sharing, which, he said, will likely be the catalyst for the stock's performance going forward. With a target price of $400, Cahall believes the stock has a 20% chance of rallying from Wednesday's close, which implies that it could rise by 20.5%.

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Assuming a 40% conversion rate for US, Canada, Australian, and New Zealand account sharers, his base case assumes 30 million account sharers convert to paying subscribers. 25%, or 7.5 million, will choose a standalone membership, while 15%, or 4.5 million, will opt to add an additional member.

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In addition to the membership fee, he said there would be an additional $7.50 charge. Typically, standalone accounts range in price from $6.99 to $19.99, but most converters opting for their own account will go for the cheapest account with advertisements or the next tier up, which has no ads but does not infringe on the premium status.

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Considering the changes that are expected and the uptake that will result, incremental revenue for the fiscal year 2024 will probably be around $1.5 billion.

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Password-sharing crackdowns could also lead to an increase in revenue for other areas of the company, Cahall said, although he expects both the conversion rate and the incremental revenue per user to be lower as a result of the crackdowns. A projection based on his base case estimates that incremental revenue will grow by around $1.3 billion between now and 2024.

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According to Cahall, paid account sharing has already generated excitement among investors. As a result of early optimism about what paid sharing could mean for Netflix, Netflix has outperformed the S&P 500 this year — up 16.1% compared with 5.6% for the index. After losing 51% in 2022 during a broader technology downturn, the stock rallied 53% in 2023.