Netflix makes massive bet on live sports ahead of Q4 earnings

For streaming services, sports are playing an increasingly important role in attracting new subscribers.

Jan 23, 2024 - 20:30

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Netflix makes massive bet on live sports ahead of Q4 earnings

Updated at 9:39 AM EST

Netflix (NFLX) - Get Free Report shares edged higher in early Tuesday trading after the streaming service giant unveiled a massive new content deal just hours ahead of its highly-anticipated fourth quarter earnings report.

Netflix, which famously reversed its longstanding position on advertising in 2022 by adding ad-supported tiers to its subscription offerings, must navigate a lack of new content tied to industry strikes earlier this year. It also faces intensifying competition from Big Tech rivals such as Apple (AAPL) - Get Free Report and Amazon.

This summer's strikes by both the the Writers Guild of America and the Screen Actors Guild hit Netflix hard, ultimately reducing its overall offering of TV and movie titles by around 15%, following at least a decade of increases. Netflix now looks to be focusing on quality over quantity.

That strategy appears to have paid off, with Netflix earning Emmy nominations for 34 titles. "Beef," a highly-rated series about a road-rage incident that engulfs the lives of two Asian Americans in Los Angeles, won best limited series to add to its Golden Globe and Critics Choice awards.

Big Tech and traditional media companies are ramping up their efforts to win new subscribers in the global streaming war.
CHRIS DELMAS/Getty Images

Big moves from Apple into the scripted drama space, as well as Amazon (AMZN) - Get Free Report and Comcast' forays into live sports, continue to challenge the broader Netflix business model, which aims to strike a better balance between ad sales and subscription revenue while cracking down on subscribers sharing passwords.

In fact, Comcast's (CMCSA) - Get Free Report move to broadcast the NFL Wild Card playoff game between the Miami Dolphins and the Kansas City Chiefs on NBCUniversal‘s Peacock platform drew a streaming-service record of 23 million viewers.

Amazon Prime's "Thursday Night Football,” meanwhile, saw overall viewership rise 24% from 2022 levels to an average of 11.86 million viewers, according to Nielsen data.

Reports also suggest Apple and Paramount Global (PARA) - Get Free Report are in talks to bundle their streaming services, likely at a discount to current prices, as overall competition in the media space continues to intensify.

Netflix goes Raw

That likely explains Netflix's move to pay $5 billion for the streaming rights to "Raw," the WWE's flagship weekly wrestling program, from TKO Group Holdings, starting in 2025.

"'Raw' is the best of sports entertainment, blending great characters and storytelling with live action 52 weeks a year and we’re thrilled to be in this long-term partnership with WWE,” said Netflix's chief content officer, Bela Bajaria, in a statement.

How that may affect the group's near-term outlook remains to be seen. But investors are likely to focus on the group's ability to grow its subscriber base in the wake of its password crackdown while adding a more consistent revenue stream from its ad-supported tiers.

Netflix is expected to post a bottom line of $2.22 a share for its fourth quarter, which ended in December, with revenue rising 11% from 2022 levels to around $8.72 billion.

Analysts also see the group adding around 8.8 million new subscribers to its 246-million-strong global streaming platform. That's a pace similar to the 8.76 million additions it recorded over the three months ended in September.

Elevated pricing in key markets, which lifted the basic cost for U.S. subscribers to $11.99 and the premium plan to $22.99, may have slowed some end-of-year adoption. But the lower-priced ad-supported tiers might offer an attractive entry point for new subscribers that could offset its password crackdown.

Subscriber gains key to 2024 profit growth

Looking into the coming year, analysts will want to see faster subscriber growth as Netflix trims its overall content spending costs and gets a firmer grip on the newly launched matrix of ad-supported and subscription-based tiers.

"We view net adds as the key driver of the quarter, and expect Netflix will stick to qualitative commentary framing net adds vs. the prior year," said KeyBanc Capital Markets analyst Justin Patterson. He carries an overweight rating and $545 price target on the stock.

"If paid sharing remains a tailwind, we could see net adds of 4 million-plus," he added. "However, we err on the side of conservatism for now, and expect a slight year-on-year increase of 2.6 million net adds."

Earlier this month, Citigroup analyst Jason Bazinet cut his rating on Netflix to neutral from buy, while keeping his $500 price target in place. Bazinet argued that higher content-spending plans and muted revenue-growth prospects could squeeze profit margins.

“On almost every metric, [Wall Street] expects robust results over the next two years," Bazinet said in a note to clients. He cited "accelerating revenue growth, [earnings before interest and taxes]-margin expansion to new highs, muted increases in content spending, robust free-cash flow and large share repurchases."

“In short, we believe expectations are high," he added.

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Ample cash on hand, which may top $8 billion by the end of next year, could give Netflix the firepower it needs to fund new deals, however, with "the most likely target a videogame publisher with a robust portfolio of" intellectual property.

Investors will also want to hear the group's succession plan for Scott Stuber, Netflix's former chairman of films, who is leaving to start his own media company later this spring.

"I hope to find new ways to continue to work together," Netflix content chief Bajaria told investors following news of Stuber's departure.

Netflix shares were marked 0.4% higher in early Tuesday trading to change hands at $487.14 each, a move that would extend the stock's six-month gain to around 13.8%.