Netflix is expected to post strong subscriber gains when it reports its latest quarterly results on Oct. 18, but you couldn’t tell that from the stock’s performance since the global streamer’s July earnings update, when it added 5.9 million subscribers to total 238.4 million global paid memberships.
That is because shares in the streaming giant, run by Ted Sarandos and Greg Peters, have been losing ground since then as investors have been evaluating its earnings outlook amid cautious management comments about the growth of the firm’s nascent advertising tier and margins. “Building an ads business from scratch isn’t easy and we have lots of hard work ahead,” Netflix leadership said in a letter at the time.
Netflix executives also have signaled a possible increase in spending on licensed content. And any insight into the financial impact of the streamer’s password-sharing crackdown will also be closely watched. Indeed, some analysts have revisited and tweaked their earnings forecasts and reduced their stock price targets. Their takeaway: Wall Street expectations may have become a bit too exuberant near-term.
The stock has taken a hit as a result. Since its last earnings report on July 19, Netflix shares “saw a reversal in stock performance, with shares down 22 percent versus the S&P 500 down 7 percent on the back of investor concerns,” Goldman Sachs analyst Eric Sheridan noted in an Oct. 8 report. For the year-to-date period though, Netflix’s stock is still up around 20 percent as of Oct. 13.
ARM, average revenue per member, also known as ARPU, average revenue per user, has been one of the key investor debates about the stock, with a focus on how stronger subscriber growth momentum in international markets with lower ARMs and how the crackdown on password-sharing households is affecting the metric. “While there may be a long(ish) tail of sharers still to come, sharers are not great members,” argued Wells Fargo analyst Steven Cahall in a recent report, of password sharing accounts. “Third-quarter ARPU guidance implies dilutive tier trading, and the stock will likely struggle to work on higher subs but lower ARPU.”
Mid-September comments from Netflix CFO Spencer Neumann at a Bank of America investor conference have also given some pause or a reason to re-evaluate some of their expectations. “We’re still in the crawl of the crawl, walk, run stage,” the Netflix executive said back then about the state of the company’s advertising business. “We’ve got a lot of work to do.”
And Neumann signaled that margin growth would also be more gradual as the company invests in growth opportunities. After a 21 percent operating margin in 2021, Netflix reported a 17.8 percent margin at the end of 2022. For this year, the streamer continues to target 18-20 percent. “Our priority is to accelerate revenue growth, and as we do that, then to start ticking up margins again,” the CFO told the investor conference. “So we’re starting to do that this year. And we would expect to do that going forward in ’24 and beyond. But we want to balance it with being able to invest in all that big growth opportunity, that big prize … in terms of those big addressable markets. So we want to have a balance.”
With this backdrop, Netflix reports its third-quarter results on Wednesday after the stock market close, with a conference call at 3 p.m. PT. Here is a look at what some Wall Street experts are expecting beyond latest color and guidance that could help them further update their subscriber and financial models.
Morgan Stanley analyst Ben Swinburne in an Oct. 11 report cut his Netflix stock price target by $20 to $430, while sticking to his neutral-type “equal-weight” rating, summarizing his rationale this way: “We trim estimates on higher content spend, perhaps from incremental licensing from its media competitors. As the streaming winner with global scale, Netflix deserves a premium. However, consensus estimates and (stock) valuation reflect too much too quickly from password sharing (payments) and advertising.”
Swinburne sees several risks to Wall Street subscriber growth estimates for next year. “In 2024, Netflix will comp the net additions benefit from implementing password sharing in 2023. This may be contributing 7-10 million, or 30-50 percent of the 21 million net additions we and consensus forecast in ’23,” the expert explained. “In addition, our and consensus revenue expectations for 2024 assume a return to regular way price increases. This will mostly likely lead to a year-over-year increase in churn in 2024.” Swinburne’s conclusion: “The combination of these two factors creates risk to 2024 consensus estimates of 18 million net adds,” with his latest estimate standing at 14 million.
How about Netflix’s advertising business? “While the AVOD tier should expand the total addressable market over time, in our view the benefits will ramp more gradually than consensus expects,” the Morgan Stanley analyst argued.
Swinburne also discussed the impact on Netflix from Hollywood giants having returned to licensing some of their content to others rather than keeping it all for their own platforms. “Netflix can license from the major media studios again — a long-term positive, in our view,” he argued, highlighting that this gives the streamer “new opportunities to license third-party, often-proven IP.”
TD Cowen analyst John Blackledge recently also lowered his Netflix stock price target due to the longer-term financial outlook for the company. While maintaining his “outperform” rating on its shares, he cut his price target by $15 to $500.
Blackledge forecasts net subscriber additions of 6.5 million in the third quarter and revenue growth to accelerate to 7.6 percent “helped by monetization efforts,” he wrote on Oct. 11. But the expert also noted some downward revisions. “We trimmed fourth-quarter, ’24 and long-term estimates off recent CFO comments that go-forward margins would expand more gradually than typical,” Blackledge explained the reasons behind the reduced stock price target.
The expert also listed possible catalysts for Netflix shares. “We view third-quarter earnings and fourth-quarter 2023 guide as near-term catalysts, as well as progress related to the ad-supported tier and paid sharing initiatives,” he wrote. “Any further pricing increases in one of the company’s major markets could also act as a catalyst.”
Goldman Sachs analyst Eric Sheridan, who has a “neutral” rating on Netflix, also cut his stock price target by $10 to $390 on Oct. 8, outlining his mixed expectations. He boosted his third-quarter subscriber growth forecast from 6 million to 6.3 million, including raising his estimate for gains in the U.S. and Canada from 900,000 to 1.1 million. This brings his subscriber expectations to above average Street estimates “as a mixture of continued password-crackdown execution, relative strength versus competition in terms of breadth and depth of content on the platform (against the backdrop of strikes) and varying price points stimulate demand,” the expert explained.
He added that his estimate updates also reflect such trends as “higher net adds, largely driven by Asia Pacific with third-party data indicating higher net adds from emerging markets,” and “slightly lower average revenue per member in the near-term reflecting larger mix from emerging markets and elements of spindown activity (to lower-priced tiers), partially offset by expected price increases starting in 2024, with expectations for U.S./Canada and Europe, the Middle East and Africa, markets first.”
Like others on Wall Street, the Goldman Sachs expert wondered if Netflix executives will comment on expected price increases in the new year. “During the length of the strikes, with WGA resolved recently, there was concern around Netflix’s pricing power and potential to raise prices in 2024 as new content releases for U.S. scripted TV and films slow down,” Sheridan explained. “However, recent press reports indicate that Netflix plans to return to their normal cadence of price increases upon resolutions with WGA and SAG-AFTRA.”
All in all, the analyst stuck to his “neutral” rating, emphasizing that it “reflects continued low visibility into timing/duration of Netflix’s paid sharing and ad-supported initiatives and the impact on unit economics in the near-to-medium term.”
In a Friday, Oct. 13 report, MoffettNathanson analyst Michael Nathanson maintained his “neutral” rating on Netflix, but cut his stock price target from $380 to $325. “Over the past year, Netflix has returned to being a story stock driven by the market’s once-unbridled optimism about two new revenue opportunities: 1) the introduction of an advertising tier; 2) the conversion of password-sharing accounts into fully paying subscribers,” he explained. “While we – and the company – have urged caution about the slow ramp of advertising revenues, the opportunity to convert the 100 million global password-sharing accounts into revenue-generating users has led to a wide-ranging debate about future growth with opinions ranging from large to very large (count us in the former camp).”
To assess the password crackdown given limited Netflix disclosures, the research firm partnered with Publishers Clearing House to survey 19,000 Americans aged 18-plus. “A large percentage of the password-sharing base appears not interested in converting to paying accounts. In addition, the action to curtail password-sharing appears to create negative brand equity,” Nathanson summarized the findings. “Thus, of the 30 million North American password sharing users facing a crackdown, perhaps 22-32 percent will become new paying subscribers – or 6-9 million.”
The MoffettNathanson expert argued that the streamer is only through the first quarter or so of the potential gain. “Net-net, so while this might not be the home run that the bulls might believe, the near-term opportunity to continue adding subscribers in North America seems very likely,” Nathanson concluded. “Yet, with recent comments made by management about long-term margin and ARM expansion, we reduce our long-term outlook significantly.”
Meanwhile, Wedbush analyst Michael Pachter remains more bullish than others on the Street. In a recent earnings preview report, he reiterated his “outperform” rating, $525 stock price target and Best Ideas List designation on Netflix shares. He forecast global net paid subscriber growth of 5.5 million, compared with the streamer’s guidance for gains “roughly in line” with the second-quarter addition of 5.892 million subs and a Wall Street consensus of just above 6.0 million.
“We maintained our third-quarter earnings per share estimate of $3.52, in line with guidance and consensus,” Pachter highlighted. “However, with incremental users gained from Netflix’s password-sharing crackdown added at virtually no incremental cost, and as content costs were again suppressed in the third quarter similar to the second quarter due to the labor strikes, upside to our earnings per share estimate is likely.”
Wedbush commissioned a U.S. market-focused consumer survey, with Pachter noting that “quarterly survey results are encouraging and suggest upside in the fourth quarter.” Among the takeaways he noted: “The proportion of subscribers on the ad-supported tier remained consistent in the third quarter, but we expect that to shift higher in the fourth quarter and beyond.”
Plus, “Netflix continues to benefit from former account sharers, at least 10 percent of whom opted to pay more for the extra-member feature post-crackdown, resulting in higher average revenue per user (ARPU), Pachter emphasized. “Another 10 percent of former account sharers kicked off extra members,
many of whom have signed up or will sign up for their own accounts in the coming quarters.”
Pachter, a former bear, remains bullish on the streamer on its stock: “We think Netflix is well-positioned in this murky environment as streamers are shifting strategy, and should be valued as an immensely profitable, slow-growth company.”
In one of the most recent previews, Wells Fargo analyst Steven Cahall on Oct. 12 combined long-term bullishness with a more cautious price target. While sticking to his “overweight” rating on Netflix, he cut his stock price target by $40 from $500 to $460 under the headline “Resetting Expectations.”
“Netflix will be investing in ad tech and content, which will reduce margin expansion but also accelerate revenue,” the Wells Fargo analyst wrote. “We’re below Street for the upcoming fourth-quarter guide, but patient buyers.”
Cahall trimmed his 2023, 2024 and 2025 earnings per share estimates by 2 percent, 5 percent and 9 percent, respectively. “However, we think underlying price increases ahead will accelerate revenue to +15 percent year-over-year in ’24 on ARM +6 percent year-over-year” from 6 percent and -1 percent per his 2023 estimates, the expert wrote. “As the investments bear fruit our out-year, estimates move higher.”
Cahall’s conclusion: “We think long-term investors should buy any post-earnings weakness.”
On the Netflix earnings conference call, beyond everyone’s interest in management commentary on the actors strike and expectations for a return to regular production work post-strikes, the Wells Fargo analyst also noted to watch for color on possible content licensing opportunities in deals with Hollywood giants. “We’re seeing more content coming to market, with (former USA series) Suits‘ success on Netflix marking a paradigm shift that reinforces how much more valuable library can be on the leading platform,” wrote Cahall. “We think Friends, HBO library titles and even Disney content could come to market.”