Netflix (NFLX) is starting to crack down on rampant password sharing on its video streaming service. The news is an indication that Netflix is looking to remove freeloaders from its subscription service. Netflix shares fell on Friday.
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Some users received pop-up messages asking them to set up their own accounts, if they did not live with the password owner, according to the online publications GammaWire and Streamable.
“If you don’t live with the owner of this account, you need your own account to continue watching,” says the message. Netflix then offers these people a free trial service. The message also offers an option for users to verify that they are the account holder, or an authorized user, with a verification code that can be sent via text message or email.
Netflix employees are calling the test program account verification messages.
Netflix’s stock is at risk of falling 50%
In the past, Netflix executives have expressed little concern about sharing passwords, saying these users help promote the service. But with subscriber growth likely to be slow, Netflix is now interested in converting these non-paying users into subscribers.
Needham analyst Laura Martin believes the crackdown on Netflix’s password sharing is an indication of the slowdown in the growth of subscribers to the service. She evaluates Netflix’s shares as underperforming.
In a note to customers on Friday, Martin said Netflix faces a high risk of subscriber turnover in 2021, as consumers emerge from the Covid-19 pandemic blockade.
“After being locked up at home for more than a year, millions of consumers are eager to spend money and time in the physical world,” she said. “As the hours per day are fixed, this must be at the expense of digital hours.”
Netflix shares are at risk of falling 50% and could drop to 250 if they “lose their growth credentials,” said Martin.
In the stock market today, Netflix shares fell 1% to 518.02.
Password sharing increases during the recession
Netflix’s password sharing increased during the economic recession caused by the pandemic, Wedbush Securities analyst Michael Pachter told Investor’s Business Daily.
“It is estimated that the pandemic has resulted in 10 million unemployed workers, the majority in low-paid jobs,” said Pachter. It is “likely that some of them have shared (Netflix passwords) with parents and friends”.
Pachter evaluates Netflix’s shares as underperforming.
TDG Research estimates that a third of Netflix’s paid users in the U.S. share passwords with friends or family members who live elsewhere.
“Ending password sharing was not imperative, as long as growth was robust,” TDG analyst Michael Greeson told Investor’s Business Daily. “Now that is no longer the case, it is a smart move.”
BofA Securities analyst Nat Schindler says that cracking down on password sharing may be a favorable factor for Netflix’s actions.
“We see a possible password breach as an impetus for adding subscribers to the network,” Schindler said in a note. He values Netflix shares as a buyout, with a target price of 680.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories about consumer technology, software and semiconductor stocks.
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