Netflix: Investors ‘too pessimistic’ about paid account sharing, analyst says

Jason Helfstein, Oppenheimer & Co Managing Director - Head of Internet Research, joins Yahoo Finance Live to talk about Netflix's password-sharing crackdown and the outlook for the company's stock.

Video Transcript

INES FERRE: --of its password sharing restrictions and the slower pickup of its ad tier. Could this be the time to buy? Joining us is Jason Helfstein, managing director and head of internet research at Oppenheimer and Company. And Jason, you have an outperform rating on Netflix. You find this to be an attractive entry point, why?

JASON HELFSTEIN: We do. So a few numbers to share. So the stock was up 20% after reporting fourth quarter earnings versus the NASDAQ up 11, as they were able to tell a solid subscriber story in kind of that they still had further to grow. Meanwhile, the stock is now off 22% versus the NASDAQ down 7%. It's already the middle of March. At this point, it does not look like they're launching page sharing this quarter. So this quarter, we would expect just subs probably to be better than expected. But from-- we're actually not concerned with page sharing because we think it's actually going to improve revenue.

SEANA SMITH: How big of a boost, Jason, do you it will be to revenue?

JASON HELFSTEIN: So we've done sensitivity work that it could be anywhere from $2 to $8 billion of incremental revenue, which is something like 6% to 23% of our current estimate this year. I think there's a debate of will-- if somebody gets upset that they're asked to pay a higher fee, what tier will they go to. Part of the way the company is doing this is, you're going to have to pay more for HD.

And so if you've been borrowing somebody's Netflix password for the last five years or longer, and you've been watching HD, and you kind of end up, let's say, in the ad tier on more of a basic definition, 720, we think there's a higher likelihood that you will actually opt for the more expensive plan, especially if you've got a larger fully HD television.

And then secondly, we think people, or in my case, for example, am I really going to kick off my college age son or my mother? Because they don't live in my household-- over $5 a month, which is kind of what we're going to see. So we think the company has been looking at this for years. They purposely made Netflix the easiest service to share and built a tremendous amount of loyalty from viewing and the shows that they have. And so we just think investors are too pessimistic about how this will play out.

INES FERRE: Jason, you mentioned the ad tier offering. And I will confess, I actually signed up for that ad tier offering because I wanted to watch one documentary. And it was so annoying to go through those ads because when I tried to click on to a different browser when the ads came on, the ad stopped. So you had to actually watch it. And I thought, this is not worth it. So given this sort of anecdote that I just mentioned and what you were just talking about, the ad tier, do you find that it will be annoying for people to have the ad tier offering and that they will want to upgrade?

JASON HELFSTEIN: Oh, well, we clearly see that paid commercial streaming has been very popular, right? But what we're also seeing is that if you want to kind cover all of basically TV viewing households, there are a percent of TV viewing households who can't afford to pay for all of these services and so kind of don't have a choice. Now, look, you can upgrade from $7 a month to $10 a month. So for $3 more a month, definitely less expensive than typical Starbucks, you can avoid the ads.

So we don't think-- for most consumers, if they really find the ads annoying, they'll pay the extra $3. You have a lot of consumers who said ads are OK. Now, look, it's super early. And Netflix should be able to have very targeted ads. And there's a lot of data that suggests that as long as the ads are targeted and relevant, consumers don't hate them. And they also don't want too many, right, as we're thinking about where we're coming from linear TV.

So you've got to think of that perspective. The perspective is for people who haven't had per se Netflix in the past. They've been watching 22 ads an hour on linear TV, right? And we're going to whatever this is going to be, four ads an hour, six ads an hour. We don't know where this is going to shake out, but it's going to be a lot less than linear. And presumably, they're going to be targeted because they know who you are, right? Where linear TV, if you're watching on a cable box, doesn't necessarily know who you are. And then if you still don't like that, you can pay $3 more a month and have it ad-free.

SEANA SMITH: There's always the option to upgrade there, Ines.

INES FERRE: Yeah, I know.

SEANA SMITH: Maybe they're going to get you to do that soon. Jason, let's talk about competition and what Netflix is up against because there's been lots of talk, especially over the last couple of quarters, about M&A in this space. There will only be a handful of winners within streaming. Are you part of that? Do you buy that?

JASON HELFSTEIN: Yeah, look, we think it's more of on that and we don't formally cover the big media stocks. We just cover internet stocks. But we do think there'll probably be more consolidation on the media company side. And it does get tricky because when you own broadcast television stations, there are government regulations on how many you can own. But we do think that you'll probably see further consolidation some of this does depend also who's in the White House and how friendly the administration is to consolidation, which the current administration is not particularly favorable to M&A right now.

But yes, there's probably too many services, and they need to get bundled. You're already basically seeing HBO and Showtime, right, being bundled with their parent company services. The narrative that the big media companies are all putting out is that they need to get streaming to become profitable sooner. It's just too big of a profit drag, especially when they're trying to manage the impact of inflation and the current environment we're going through.

You're probably still going to see content spending up this year. Only really Disney talked about lower content spend. But we do think you're going to see less marketing spend by all the companies. I'll also cite if you look at some of the engagement data, Netflix is down versus the fourth quarter on engagement metrics, but it's consistent with the trailing six quarters. So a little-- so not as good as the fourth quarter, but we think plenty good to keep consumers engaged.

SEANA SMITH: All right, well, Netflix closing up today, up just about 3%, bucking that downward trend that we certainly saw in the broader markets. Jason Helfstein, great to have you. Thanks.