"The company has been looking at this for years. They purposely made Netflix the easiest service to share and built a tremendous amount of loyalty from viewing and the shows that they have," Jason Helfstein, managing director and head of internet research at Oppenheimer & Co., told Yahoo Finance Live in an interview on Wednesday.
"So we just think investors are too pessimistic about how this will play out," he said, estimating the crackdown on password sharing could add $2-$8 billion in incremental revenue this year.
In its quarterly letter to shareholders published in January, Netflix said it would be intensifying its push to combat password sharing in Q1, although the streamer did not provide details on when exactly that would occur and what countries would be impacted.
Since then, Netflix has broadened its crackdown to include countries like Canada, New Zealand, Portugal, and Spain, in addition to the test countries of Chile, Costa Rica, and Peru. So far, there has been no announcement regarding U.S. users.
The password crackdown may have forced Netflix to slash prices overseas, a staunch concern for investors with shares sinking 7% since the price cut announcement on Feb. 23.
"We believe such dramatic price reductions across so many markets confused the Street," Citi analyst Jason Bazinet wrote in a new note to clients on Thursday, surmising the price cuts reflect the pending "global enforcement of password sharing."
The company slashed prices by 50% in about 100 overseas markets, including Yemen, Jordan, Iran, Kenya, Croatia, Venezuela, Indonesia, among others. According to Citi research, that's about 6% of its subscriber base.
"The Netflix story is going to remain a little complex as investors contend with the new ad tier and concurrent password sharing enforcement," Bazinet added.
Still, Netflix's password crackdown and its recently launched ad-supported tier have been seen as meaningful profitability drivers, especially as competition within the streaming space escalates.
Helfstein, who has an Outperform rating on the stock and a current price target of $415 a share, cautioned it's still early days for Netflix's ad tier, but that the company has tools to improve the overall ad experience for consumers.
"Netflix should be able to have very targeted ads. There's a lot of data that suggests that as long as the ads are targeted and relevant, consumers don't hate them," he said. "For most consumers, if they really find the ads annoying, they'll pay the extra $3."
Since Netflix launched its ad tier on November 3 in the U.S., shares are up about 13% — outpacing the Nasdaq's 9% gain over that same time period. The stock is up about 5% since the start of the year.
With additional reporting from Brian Sozzi