Netflix is poised to have a successful Q2 according to Michael Pachter of Wedbush Securities. Even though the beginning of 2022 has presented a rough start for the streamer amid subscriber losses, the analyst predicts a recovery with growth internationally and advertising support. His forecast comes even as news broke that Netflix is laying off 150 employees given its recent stock declines. "They're right-sizing the workforce, and we're talking about a couple of percent of their workers," he said. "It's not like they laid off half their workers, so they're trimming and they're going to keep trimming until they get it right. I think that once they start growing again, they will fund their growth out of profits."

Closing Bell

Michael Pachter Sees Netflix Poised to Grow Despite Subscriber Losses, Layoffs

gaming giant Netflix is trying to turn the corner after a shocking first quarter subscriber slump, the company is exploring an ad supported tier and releasing popular shows like Ozark and Stranger Things on a staggered timeline to try to lure those users. Our next guest says these moves are putting the company back on track, positioning it for growth. His firm is actually upgrading the stock from neutral to outperform joining us now, Michael Pachter, managing director of equity research at Wedbush Securities, thanks so much for joining us. I gotta ask you first question here, why upgrade netflix? What stands out right now is a positive step forward to you at this point in time when we're seeing so much criticism, I think from a larger scale around streaming and just how profitable this industry is. Thank you for having me asia. Um, you know, I had had a sell rating on these guys for 10 years, so from 2011 november 2011 until much earlier this year, I had to sell, I upgraded to neutral at 3 40 it was down halfway from its peak. Um, I just upgraded at 1 80 and the truth is that Back in 11, I correctly forecasted that all the media companies would compete with their own streaming services, but it took eight years for the first of them to do that. Um, here we are now, all the content that's ever going to be pulled off of the Netflix platform has been pulled off. So they're kind of recovering from that and they've done a masterful job of building their own content. Um, I never expected they would get much above, you know, 30 or 40 million subscribers, they expanded internationally phenomenally successful east, they have 75 million domestic and another 145 million international. They still have room to grow internationally. And I think what people are missing with this recent misstep is that, you know, netflix only declined in subs because they are so far and away the market leader. So you know, if you think about their subscriber base and let's just look at domestic, You know, they have 75 million subscribers, There's only 130 million households and only half of those are above median income. So by definition they have about 20 or 25 million below median income households who are subscribers. Those people are going to make a choice if they decided to add a 3rd and 4th service whether they can afford to pay for four at a time or they're going to drop one in favor of another. That's what we're seeing. And I think that phenomenon, while likely to recur is not going to become a persistent problem for netflix. I think they're going to lose their few million subscribers once and then begin back on the path to modest growth. They're taking steps like advertising support, which is going to lower the price and keep some of those lower income households as members. They're taking steps like staggering releases of their popular programming to keep people from churning out if you spread stranger things over 13 weeks instead of dumping it all, at once people will stay subscribers subscribers to 13 weeks and you know, you're starting to see them, they say crackdown on password sharing. I don't actually think they'll end up doing that, but that positions them to create a higher price plan, you know, kind of an unlimited sharing plan. And I had that with Spotify, I was paying 9 99 a month and then my kids started driving and they want to Spotify in the car and they have Bluetooth connected cars. So we went from 999 to 1599 and Spotify is making $6 a month more off of us. Netflix can do that. So I see price increases, ad supported at a lower price and staggering releases as getting rid of churn and then when they start growing and minting money, I think investors are going to appreciate the story. Yeah. And Michael, I mean netflix is today announcing the layoff of 150 employees across the company citing the slowing revenue growth and also subscriber losses that you mentioned, still the dominant player in this industry, but nonetheless, making layoffs is never a good look. What are your thoughts on this, especially as the subscriber loss was reported weeks ago that you had mentioned. Um, and also just seeing the contraction that we're seeing in this arena, You know, is I think that they drank their own kool aid and they thought that they were going to grow forever, you know, and I think investors also drank that kool aid and that's why the stock ripped up to 690 I think with the stock down here, they have to get more realistic that maybe they're not growing as fast as they thought they were and they were built to continue to grow. So they're right sizing the workforce and we're talking about a couple of percent of their workers, it's not like they laid off half their workers, so they're trimming and they're going to keep trimming until they get it right. I think that once they start growing again, they will fund their growth out of profits. And I think that's the prudent way to run the business, but you know, nobody, nobody should expect that they have a job for life anywhere, Fortunately we have pretty full employment. So I would expect those 150 people are going to find work elsewhere. And honestly having worked at Netflix, they're valuable to all the other streaming services. So odds are, they're going to all get employed pretty quickly. Netflix has to manage this business for profit and they're telling investors now we're doing that. So again, this reinforces my by thesis that the company is getting real about, you know, how fast they're growing and how profitable they need to be? Yeah, Michael just about a minute left with you, I got to know. What do you think is Netflix's biggest pain point at this point? And where do you think they're gonna alleviate that in the future moving forward? Well, the biggest problem I think that they face is that they have to decide to be two companies one a very slow growth or no growth mature business that generates a ton of profit and that's the U. S. And possibly a few countries like the UK and Australia and the other, a hypergrowth business. Asia pacific, particularly India where they can invest resources and continue to grow. So I think once they realize that, and once they once they agree that's the way to go, investors are going to reward them. So they just have to acknowledge that they aren't the high flyer that they were a few months ago. All right, Michael Pachter, managing director of equity research at Wedbush Securities, appreciate your insight