By Angela Palumbo

Netflix management started to change the way the streaming company operates almost three years ago -- and those once-controversial decisions have paid off, based on the latest quarterly earnings.

Netflix reported better-than-expected first-quarter financials after the stock market closed on Thursday. More importantly, the company responsible for Stranger Things gave second-quarter earnings and revenue guidance that beat Wall Street estimates and reiterated its full-year outlook. That's a big deal when there's continued economic uncertainty clouding tech investors' sentiment.

"This further validates our bullish thesis on Netflix as the company remains very well positioned in the Media and Entertainment landscape with sustainable growth drivers that should prove to be predictable and defensive amid a wide range of macroeconomic scenarios," BofA Securities analyst Jessica Reif Ehrlich wrote in a research note Friday. She rates Netflix as a Buy with a $1,175 price target.

It's not easy to for a company's stock to be called a defensive play in a potential recession if the services the company provides aren't considered essential. However, changes to Netflix's business -- such as offering a lower-priced tier with advertisements, cracking down on password sharing, and raising prices -- have helped the company get here.

Netflix launched its ad-supported tier in November 2022. At the time, some analysts were concerned the new subscription option would encourage existing customers to trade down, cutting their monthly spend and hindering Netflix's revenue growth. Netflix argued at the time that it gave people "more choice, especially for more price-conscious consumers."

When Netflix made it harder for people to share their Netflix accounts across different households in May 2023, the company said that about 100 million households worldwide were watching the service without paying. Breaking the norm leads to controversy, and there were many users who were upset with this change.

Two years later, and the stock is riding high. Netflix shares have gained about 273% since the ad-supported tier launched on Nov. 3, 2022. The S&P 500 has increased 40% in the same time frame on a price-return basis.

Since that subscription plan was unveiled, Netflix has consistently reported strong subscriber growth. When the company published its fourth-quarter earnings in January, Netflix posted a net gain of 18.9 million paid subscriptions -- a record that far exceeded estimates. The need for people to get their own accounts, and the option to do so at a lower price point with ads, helped push Netflix's growth forward.

That trend is unlikely to change. "Even in a global recession scenario NFLX is likely to be highly resilient given the price-to-value of the service remains very attractive (especially given the ad-supported offering) and their advertising business should demonstrate strong growth in any scenario given its nascent state," Pivotal Research Group analyst Jeffrey Wlodarczak wrote on Thursday. He rates the stock as a Buy with a $1,350 price target.

Netflix, of course, isn't totally immune to economic risks. Growth could take a hit if consumers trade down to the lower-priced tier -- or cancel subscriptions all-together.

Advertisers may also choose to pull back their spending if the economic environment slows. But Netflix management said on Thursday that there's been "no material change to our overall business outlook since our last earnings report."

Investors have been betting on the company's resilience in 2025. Shares are up 9.2% this year, far outperforming the S&P 500's 10% decline.

Write to Angela Palumbo at angela.palumbo@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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April 18, 2025 14:51 ET (18:51 GMT)

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