One Analyst Is Upgrading Netflix Shares Despite The Subscriber Loss: Here's Why

While several analysts are moving to the sidelines or downgrading shares of streaming giant Netflix Inc NFLX after the company’s first-quarter earnings report, this analyst is upgrading shares.

The Netflix Analyst: Needham analyst Laura Martin is upgrading shares of Netflix from Underperform to Hold. The analyst does not have a price target on shares.

The Analyst Takeaways: Netflix reported a loss of subscribers in the first quarter, its first loss of subscribers since 2011. The company also guided to lose two million subscribers in the second quarter.

Despite missing subscriber guidance for the first quarter and sharing poor second-quarter guidance, Martin saw a key piece revealed during the company’s earnings call.

“Today we upgrade NFLX to Hold from Underperform because, for the first time, the CEO stated NFLX will introduce a low-priced advtg tier over the next 18-36 months,” Martin wrote in the note.

Related Link: Netflix Shares Plunge After Q1 Earnings, First Subscriber Loss Since 2011

Netflix, which raised its monthly subscription price recently, lowers its total addressable market when it increases prices, Martin said.

“We believe that NFLX must add a lower-priced option to compete with Disney+, discovery+, Apple+, Hulu, Peacock and Paramount+.”

Martin said these offerings from Walt Disney Co DIS, Warner Bros. Discovery WBD, Apple Inc AAPL, Comcast Corp CMCSA and Paramount Global PARAPARAA have tiers that range from $5 to $7 for a monthly subscription, or in some cases a free, ad-supported option.

“We believe NOT having an ad-lite tier lowers NFLX ROIC, shrinks its TAM, grows its customer acquisition costs, and aids its enemies.”

Martin said Netflix will not be able to win the streaming wars if the company does not add the lower-priced ad-supported subscription option. The analyst also points to options for Netflix to continue growing including adding sports and news content, offering bundling options with other products and acquiring a large library of film and television content.

Netflix’s competitors are all taking the steps mentioned by Martin, leaving Netflix in a position of needing to make changes to survive.

Martin said an advertising tier option won’t add to the company’s revenue in 2022. Martin sees the new tier and password sharing crackdowns unlikely to add to 2022 revenue.

“It is unclear when in 2023 either could become a material rev upside growth driver. We model positive impacts to begin in 2H23, which may be too soon,” she said.

The key cautions for Martin are slowing revenue and the weakened guidance, increased subscriber and employee churn and saturation of the streaming market in the U.S.

Martin praised Netflix for saying that it is now a “show me” story and not a “tell me” story. Martin said Netflix created the streaming category, but has been slow to adapt to new innovations in the sector with heavy competition.

NFLX Price Action: Netflix shares are down over 35% to $224.11 on Wednesday, according to Benzinga Pro.