Guggenheim Securities analyst Michael Morris joined ‘Squawk on the Street’ to discuss the future of Netflix (NFLX), emphasizing that the streaming giant still has significant growth potential. He recently adjusted his price target for Netflix to $1,100, (the name was last trading at $959.21) maintaining a ‘Buy’ recommendation. This optimism is rooted in several key factors.
Firstly, Morris highlighted the low penetration rate of Netflix globally compared to the number of broadband households. He noted that while there are approximately 750 million broadband-connected households worldwide (excluding China and Russia), Netflix currently has about 300 million subscribers. In the U.S., where Netflix has been most successful, about two-thirds of households subscribe, but globally, only about one-third do, suggesting a vast opportunity for member growth. This is evidenced by Netflix’s recent addition of 4 to 5 million households in the U.S., a market previously thought to be saturated.
On the topic of pricing power, Morris pointed out that Netflix is seeing both price increases and profit expansion across its subscriber base. Despite average revenue per user (ARPU) potentially facing pressure in lower-priced markets as the subscriber base expands, this is viewed positively as it indicates robust subscriber growth. The company has announced price hikes in several markets, including the U.S., which supports the narrative of strong pricing power. Moreover, Netflix’s operating profit margin is expected to approach 30%, with guidance at 29% for the year, marking an upward revision.
The discussion also touched on the potential ceiling for price increases and whether they might lead to churn. Morris believes that with Netflix’s engagement levels at around 2 hours per day per household and its TV time share growing, the company still has room to maneuver on pricing. The introduction of an advertising-supported tier provides consumers with more options, potentially offsetting any negative impact from price increases by giving users the choice between paying more for an ad-free experience or opting for a lower-cost, ad-supported service.
Regarding the ad-supported tier, Morris has high expectations. Currently, advertising contributes a mid-single-digit percentage to Netflix’s revenue, but he estimates it could account for as much as a third of the company’s revenue growth. This growth comes not only from users opting for the ad-supported model but also from live programming that reaches even premium, ad-free subscribers. Comparing Netflix to Hulu, which generates about $3 billion in ad revenue annually, Morris believes Netflix, already surpassing $1 billion, will continue to exceed this benchmark in the future.
This comprehensive analysis by Morris underscores Netflix’s strategic positioning for continued growth, both in terms of subscriber numbers and revenue diversification through advertising, while maintaining its pricing power across different markets.
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