Netflix's average revenue per membership, or ARM, is set to see an increase of 5% in the coming year, primarily supported by planned price hikes, despite a forecasted moderation in subscriber growth, as highlighted by UBS Securities in their recent analysis. The streaming giant reported its second-quarter results, which exceeded market expectations, reflecting a membership growth that outperformed Wall Street's forecasts.
According to Netflix, its ARM experienced a 1% increase compared to the previous year, translating to a 5% rise when adjusted for foreign exchange fluctuations, as revealed in a letter to shareholders. Predictably, Netflix anticipates that global ARM on a reported basis will remain relatively stable year-over-year in the third quarter, primarily due to persistent foreign exchange challenges and variability in plans and country mix.
Revenue growth for the third quarter is estimated at an impressive 14% compared to the same period last year. However, the company expects paid net additions to be lower than the previous year's quarter, which was significantly influenced by the first full quarter of the company’s paid-sharing initiative.
During an earnings conference call, co-Chief Executive Greg Peters noted that Netflix's ad-supported tier currently generates lower ARM figures than its ad-free equivalent. He attributed this discrepancy to the time required to fully utilize new inventory. According to analysts John Hodulik, Batya Levi, and Christopher Schoell, UBS anticipates that ARM rates for the ad-supported tier will eventually match or exceed those of the ad-free version as Netflix rolls out enhanced programmatic capabilities and introduces a new in-house technology platform slated for launch next year.
Furthermore, the UBS analysis suggests that following a period of limited pricing increases during the rollout of the paid-sharing model, Netflix is likely to implement further price hikes, capitalizing on its position in the market. The analysts noted that Netflix's pricing per hour for consumption currently stands at the lower end compared to its competitors, reinforcing their belief in the company's pricing power.
In the letter to shareholders, Netflix also revealed plans to phase out its basic tier plan in the United States and France, following a similar strategy already applied in the UK and Canada. The combination of gradual ad scaling and the discontinuation of the basic tier is seen as a strategic move to enable Netflix to achieve its goal of a 5% ARM growth leading into 2025, even as subscriber additions are projected to moderate while remaining healthy.
Reflecting on these developments, UBS has raised its price target for Netflix shares from $685 to $750, maintaining a buy rating. The brokerage views Netflix as “the main beneficiary of rationalizing” competition in the direct-to-consumer streaming space. In terms of financial performance, Netflix reported earnings of $4.88 per share for the second quarter, up from $3.29 per share a year prior, while revenue surged by 17% to reach $9.56 billion — both figures surpassing Wall Street's expectations.
The company's global net additions reached 8.05 million, a significant uptick from 5.89 million, outperforming Visible Alpha's consensus estimate which had projected an increase of 5.1 million. While the benefits from paid sharing contributed positively to these results, UBS cautions that such advantages might begin to diminish in the upcoming year.
The analysts maintain a forward-looking perspective, forecasting 13% revenue growth and a substantial 22% increase in operating income by 2025, despite anticipated challenges..