Actors’ Strike Adds to Hollywood Woes. Why Netflix Stock Could Still Win.

Meanwhile, TV and film production companies are grappling with the unraveling of cable and satellite TV—this year, the number of U.S. households subscribing to those services is likely to drop below 50% for the first time in decades, and the trend is accelerating.

Here’s how dramatically the TV world is changing: This past week

Walt Disney

CEO Bob Iger told CNBC that the traditional linear TV business—like its ABC broadcast unit—“may not be core” to Disney’s (ticker: DIS) future. Meanwhile, FAST channels—free ad-supported linear channels—are taking a growing slice of TV ad dollars, posing a new challenge for subscription-based services.

Netflix (NFLX) has been dealing with the shifting landscape for more than a year now, and this quarter’s financial results should begin to reflect the company’s restructured business model. It’s been 15 months since Netflix founder and former CEO Reed Hastings disclosed on an earnings conference call that the company was exploring the addition of an ad-backed subscription tier. Netflix has since launched a $6.99-a-month ad-supported plan, while also launching a crackdown on password sharing.

Wall Street analysts and investors are huge fans of the new initiatives. Netflix shares have rallied 53% this year, anticipating that the new ads and the password crackdown will boost revenue, profits, and subscriber growth. And now there’s reason to see even better times ahead.

UBS analyst John Hodulik recently boosted his target price on Netflix stock to $525, from $390, implying potential for nearly 20% of additional upside. Hodulik thinks that second-quarter results on Wednesday will beat the company’s guidance targets.

Netflix has forecast revenue of $8.24 billion for the quarter, up 3.4%. It’s guided to net subscriber additions about in line with its 1.75 million increase in the March quarter.

Hodulik thinks the subscriber forecast, in particular, is way too low. He now projects 3.6 million subscriber additions in the June quarter, and another 6.5 million in the September period. For the full year, Hodulik expects Netflix to add 18 million subscribers, double its 2022 growth.

It’s even possible that Hodulik’s new forecast could still be too conservative: Bloomberg’s Second Measure research unit asserts that new subscriber growth has spiked since Netflix began its password sharing crackdown, recently running more than triple the rate of subscriber additions versus the last week before the password policy change.

The one-two punch of the nascent ad strategy and the password crackdown should certainly improve Netflix’s financial outlook in the near- and medium-term, but those “year of efficiency” moves don’t directly address the saturation of the subscription streaming market, or the increased willingness of consumers to turn subscriptions on and off as appealing content shows up on other streaming services. In short, Netflix might need to try some other new things.

Jessica Reif Ehrlich, an analyst with BofA Securities, has a few ideas. Ehrlich, who will conduct the earnings call Q&A with Netflix management on Wednesday, says Netflix is “an advertiser’s dream,” with more reach and scale than any of its rivals.

Ehrlich notes, though, that the company’s ad business is still developing. She thinks Netflix needs to move on from a reliance on

Microsoft
’s
advertising software to create its own “ad tech stack.” In the short-run, she expects a bigger bump from the password crackdown, which she thinks can drive millions of additional subscribers with effectively zero incremental costs. Ehrlich also thinks there’s the chance that Netflix could begin to license its original content as FAST channels, or to other streamers. “They haven’t sold or monetized their library at all,” Ehrlich notes.

Another hot topic this quarter will be any new guidance from Netflix on potential cuts in content spending. The company has promised to boost its free cash flow, and has vowed to increase stock repurchases after buying back $400 million in stock in the March quarter. The striking writers and actors will be keeping a close tab on that question, and so will investors.

Citi analyst Jason Bazinet points out that the last actors strike, in 1980, made a big dent in box office receipts, falling 45% in 1981, before roaring back in 1982, reaching $3 billion for the first time—with a little help from the release of E.T.

Last quarter, Netflix co-CEO Ted Sarandos suggested that Netflix was better positioned than its streaming rivals to withstand a work stoppage, given its deep backlog of completed work, and its international focus that goes well beyond other streamers. Netflix can continue to produce non-English originals in parts of the world where American unions have no role.

Ironically, a lengthy outage that shuts down U.S. production for months would have the effect of cutting near-term costs and boosting earnings and margins. Talk about Stranger Things.

Write to Eric J. Savitz at [email protected]