Amidst Low Revenue, Wedbush Upgrades Netflix

A United States brokerage firm, Wedbush says it has upgraded a popular online streaming platform,  Netflix from Neutral to Outperform, despite the challenges of revenue and decline in subscribers facing the company.

Wedbush wrote on Monday that the streaming company “is positioned to grow,” citing the staggered releases of “Ozark” and “Stranger Things.”

Wedbush provides clients with a wide range of securities brokerage, wealth management, and investment banking services. 

Equity research analyst at Wedbush, Michael Pachter, doubled down on the streaming giant during an interview with Yahoo Finance Live.

“The stock was overvalued,” the analyst said, relating to its November 2021 peak of $690 a share. 

“This is not a dumb management team. They’re very smart, they have a ton of content, and they’ve made tens of billions of dollars of investment in content,” he further said.

Investors King gathered that Netflix lost 636,000 customers in the U.S. and Canada following a roughly 10 per cent price increase. That reflects a miss of around 750,000 subscribers (compared to the consensus forecast for a gain of 150,000.)

“I think the Street thinks they’re going to zero subscribers. They are not. “Netflix is going to always be the anchor subscription.”  Pachter stated.

According to Wedbush: “In our view, Netflix’s losses are primarily a result of its deep saturation in the U.S. and Canada, with other options being more attractive to new subscribers once it decided to raise price.”

However, new content rollouts could underscore the platform’s “commitment to reducing churn,” thus increasing subscriber growth and investor confidence.

Patcher said: “In our view, this experiment will be a resounding success if expanded to all Netflix originals, and we believe the company will ultimately move in that direction.”

Overall, Wedbush describes Netflix as an “immensely profitable, slow-growth company.” The firm suggested that it should raise prices in its more mature markets (U.S, Canada) in order to increase profitability to reinvest in newer markets like Latin America and Asia. 

Meanwhile, the online streaming platform has laid off 150 of its employees as its subscriber base and revenue slows down. This is coming less than a month after it disengaged at least 10 full-time staff and contractors in its editorial and marketing divisions.

On Tuesday, Netflix confirmed to Yahoo Finance that it will be laying off about 150 positions of the streamer’s 11,000 workforce in an effort to reduce spending and offset slowing revenue growth.

The sacked workers represent two percent of its workforce, largely in the U.S. The company is also eliminating 70 roles from its animation unit, as well as roles for social media and publishing contractors. 

“As we explained on earnings, our slowing revenue growth means we are also having to slow our cost growth as a company. So sadly, we are letting around 150 employees go today, mostly US-based,” a Netflix spokesperson said in a statement.

“These changes are primarily driven by business needs rather than individual performance, which makes them especially tough as none of us want to say goodbye to such great colleagues. We’re working hard to support them through this very difficult transition”, he added.

Investors King reports that Netflix’s unexpected decline in Q1 subscribers led to a stock plummet of 35 per cent and wiped more than $50bn off its market cap.

Since then, the stock has struggled to rebound, down more than 68 per cent year-to-date as investors question the longevity of the Netflix business model amid high inflation and increased competition.

To mitigate the impact of the low revenue, number of subscribers, Netflix will introduce an ad-supported subscription option and cut down on spending.

Coupled with layoffs, Netflix’s upcoming ad-supported offering, in addition to its crackdown on password sharing, should also help alleviate monetary pressures, with “great potential to drive significant revenue,” according to Wedbush.

“On balance, we think ad-supported subscriptions is a good idea, particularly as a disincentive to churn,” the note read.

As competition in the space intensifies, Patcher said it’s important to remember Netflix’s identity within the streaming wars.

Patcher noted that Netflix consumption is something north of 30 hours a month, adding that “quantity is important”.

“Nobody goes into Walmart expecting to buy premium brands and spend a ton of money. They go in for quantity. That’s what Netflix is. They’re the Walmart of streaming video, and they’ve got everything,” he said.