Morgan Stanley’s Benjamin Swinburne likely won’t be the only one to reference the Kate Bush song featured in Netflix hit series Stranger Things as Wall Street prepares for the global streamer’s second-quarter earnings report on Tuesday.

“Running Up That Hill,” the analyst titled his July 12 report, referencing the singer’s 1985 track that appeared in Stranger Things season four and then topped charts globally this summer. Like his peers and management, Swinburne predicts a second quarter of subscriber losses in a row, with the Netflix’s 221.6 million global figure likely shrinking. The expert expects Netflix to stay “consistent with global paid net adds guidance (-2 million), but we see potential downside risks from mobile app download trends, and we trim our third-quarter net adds (+1.55 million versus prior +2 million) to factor in elevated churn following the release of Stranger Things season 4.” Swinburne also cut his 2023 subscriber growth forecast from 9.3 million to 7.9 million and his price target from $300 to $220, but kept his “equal weight” rating on the stock.

Addressing rising inflation and talk of a recession in more detail, Swinburne predicted both could hit Netflix. “Streaming video revenues may prove more vulnerable than expected to a global recession and lower consumer spending levels,” he argued. “While Netflix’s leading engagement should help it retain customers, its relative price premium is likely an offset as consumers look to trim their streaming bill.”

But the Morgan Stanley expert also touted the streamer’s planned rollout of a cheaper, advertising-supported subscription tier. “Tapping into the $160 billion global video advertising spending opportunity in the long term should allow Netflix to drive average revenue per user (ARPU) growth with less reliance on consumer price increases,” Swinburne wrote. The analyst concluded by noting that the way investors view Netflix will change over time: “Net adds matter to shares, but longer-term ARPU growth expectations matter more.” After all, in the past, “the majority of Netflix revenue growth came from net adds or customer growth. As the business matures, ARPU is shifting from a secondary to a primary driver.” That is why he expects Netflix “to continue to prioritize ARPU growth, including continuing to raise prices.”

Source: Netflix filings

In a July 12 report, Benchmark analyst Matthew Harrigan similarly highlighted: “Tapping into the $160 billion global video advertising spending opportunity in the long term should allow Netflix to drive ARPU growth with less reliance on consumer price increases. In markets with high ad ARPUs, like the U.S., Netflix can offer a materially lower priced offering and unlock additional net adds without sacrificing unit economics. Advertising may also prove a consumer-friendly way to monetize password sharing.” Harrigan also noted the changes that the AVOD push could bring to Netflix’s culture. “Departing from its DNA, Netflix will also have to divulge full viewing information to satisfy ad market transparency and 3rd-party auditing demands,” he argued.

Wells Fargo analyst Steven Cahall, in a July 13 report, noted that his team’s analysis of monthly active users data implies a second-quarter net subscriber drop of only 1 million. But he stuck to his 2 million decline forecast, in line with management guidance. “The main driver of our unchanged estimates is low conviction, as we think the historically correlated metrics are less relevant at present for Netflix, which appears to be experiencing a new phase of customer churn,” he explained. “As such, prior correlations are proving less reliable, and we do not believe there is sufficient evidence to imply a bullish call into earnings.” And he highlighted: “We also have a downside bias on second-half estimates, including sub growth pressure and a foreign exchange headwind to financials.”

So what should investors expect from Netflix in terms of subscriber forecasts for the current quarter? “We sense low conviction across the Street, so this is another wait and see quarter, with investors likely resetting afterwards,” Cahall wrote.

Bank of America analyst Nat Schindler, in a June 23 report, reiterated his “underperform” rating on Netflix, but cut his price target from $240 to $196 “given current market conditions, rising costs of content production, in addition to several potential costly initiatives.” Schindler added: “Overall, while our survey indicates Netflix is currently consumers’ top choice, we believe our results are indicative that streaming has very quickly become a commoditized product following the pandemic, with original content being a key differentiating factor for a user to subscribe to the service.”

The domestic subscription run-up for Netflix “seems to be at or very near its peak,” the Bank of America analyst argued. “The availability of more services in addition to more compelling competitor value propositions have led customers to subscribe to more services on the whole while still keeping Netflix. If a recession were to take hold, however, it wouldn’t be surprising to see incremental churn.”

Near-term, it remains all about sub trends after all. Cowen analyst John Blackledge highlighted as much in his earnings preview, which had this takeaway: “Net-net, we expect investors will remain focused on net sub trajectory at the (earnings report), as well as third-quarter guide.” He forecasts a paid net decline of 2 million users, “given macro, competition and password sharing.” But he slightly raised his 2023 net adds projection due to the upcoming ad tier.

“Netflix shares are down 46 percent since first-quarter earnings on 4/19 (and down 69 percent year-to-date), with the pullback reflecting the broader trend among tech sector shares as well as Netflix-specific challenges (high existing penetration in some markets, along with password sharing, increased competition, and macro issues),” Blackledge highlighted. “Meanwhile, the stock pullback has led to more attractive valuation, in our view, ahead of the service’s likely introduction of an ad-supported tier that we estimate could add about 4 million incremental U.S./Canada subs and significant upside to ’23 U.S./Canada revenue.”

Wall Street does expect more updates on a planned crackdown on password sharing and launch of a cheaper AVOD, meaning advertising-supported, subscriber tier. After all, Netflix on July 13 unveiled that it has picked Microsoft as its global advertising technology and sales partner. “We expect more detail on the AVOD rollout, password sharing and any rethink to the content strategy to stimulate sub growth,” said Cahall. “We think the bias for second-half estimate revisions is downward.”

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