Netflix co-chief executive Ted Sarandos
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Netflix is expected to post strong subscriber gains when it reports its latest quarterly results on October 18, but that won’t be evident from the stock’s performance since the global streamer’s July earnings update, when the company reported 5.9 million subscribers to a total of 238.4 million paid memberships added worldwide.
That’s because shares of the streaming giant, led by Ted Sarandos and Greg Peters, have since lost ground as investors have assessed its earnings prospects amid cautious comments from management about the growth of the emerging advertising industry and the company’s margins . “Building an advertising business from scratch is not easy and we still have a lot of hard work ahead of us,” Netflix executives said in a letter at the time.
Netflix executives have also signaled a possible increase in spending on licensed content. And any insights into the financial impact of the streamer’s crackdown on password sharing will also be closely monitored. In fact, some analysts have reviewed and adjusted their earnings forecasts and lowered their share price targets. Their conclusion: Wall Street’s expectations may have become a little too exaggerated in the short term.
The stock took a hit as a result. Since its last earnings report on July 19, Netflix shares have seen “a turnaround in stock performance, with shares falling 22 percent versus the S&P 500 by 7 percent due to investor concerns,” Goldman Sachs analyst Eric Sheridan noted. in a statement dated Oct. 8 report. However, over the course of the year so far, Netflix shares have still risen by around 20 percent (as of October 13th).
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 stronger subscriber growth momentum in international markets with lower ARMs and the crackdown on password-sharing. Households impact the metric. “While there will still be a number of sharers, sharers are not great members,” Wells Fargo analyst Steven Cahall argued in a recent report on password sharing accounts. “Q3 ARPU guidance implies a dilutive tier trade and the stock will likely struggle to operate with higher subs but lower ARPU.”
Netflix CFO Spencer Neumann’s comments at a Bank of America investor conference in mid-September also gave people pause or reason to reassess some of their expectations. “We’re still in the crawl, walk, run phase,” the Netflix executive said at the time about the state of the company’s advertising business. “We have a lot to do.”
And Neumann signaled that margin growth would also be slower as the company invests in growth opportunities. After an operating margin of 21 percent in 2021, Netflix reported a margin of 17.8 percent at the end of 2022. For this year, the streamer is still aiming for a margin of 18 to 20 percent. “Our priority is to accelerate sales growth while increasing margins again,” said the CFO at the investor conference. “So we’re starting it this year. And we expect this to continue to be the case in the future in 2024 and beyond. But we want to have the balance with the ability to invest in all of these big growth opportunities, this big win… in terms of these big addressable markets. That’s why we want to have a balance.”
With this in mind, Netflix will announce its third quarter results on Wednesday after the market closes during a conference call at 3:00 p.m. (PT). Here’s a look at what some Wall Street experts expect beyond the latest information and guidance that could help them further update their subscriber and financial models.
Morgan Stanley analyst Ben Swinburne lowered his price target on Netflix shares by $20 to $430 in an Oct. 11 report, but maintained his neutral “equal weight” rating and summarized his reasoning this way: “We is cutting estimates for higher content spending,” possibly through gradual licensing by its media rivals. As a streaming winner with global reach, Netflix deserves a premium. However, consensus estimates and (stock) valuations reflect too much of password sharing (payments) and advertising too quickly.”
Swinburne sees several risks to Wall Street’s subscriber growth estimates for next year. “In 2024, Netflix will offset the net incremental benefit from the introduction of password sharing in 2023. This could represent 7 to 10 million, or 30 to 50 percent of the 21 million net additions that we and the consensus have forecast in 2023,” the expert explained. “In addition, our and consensus revenue expectations for 2024 assume a return to regular price increases. This will most likely result in a year-over-year increase in churn in 2024.” Swinburne’s conclusion: “The combination of these two factors puts at risk the consensus estimates of 18 million net new entrants in 2024,” with his most recent estimate at 14 million.
How about Netflix’s advertising business? “While the AVOD tier should expand the total addressable market over time, we believe the benefits will grow more slowly than consensus expects,” the Morgan Stanley analyst argued.
Swinburne also discussed the impact on Netflix of the Hollywood giants, who have moved to re-license some of their content to others rather than keeping everything for their own platforms. “Netflix can once again obtain licenses from the major media studios – a long-term advantage in our view,” he argued, emphasizing that this offers the streamer “new opportunities to license often proven third-party intellectual property.”
TD Cowen analyst John Blackledge also recently lowered his price target on Netflix shares due to the company’s longer-term financial outlook. While he maintained his “outperform” rating on his shares, he lowered his price target by $15 to $500.
Blackledge forecast third-quarter net subscriber addition of 6.5 million and revenue growth accelerating to 7.6 percent, “supported by monetization efforts,” he wrote on Oct. 11. However, the expert also noted some downward corrections. “We have cut fourth quarter 2024 guidance and long-term estimates due to recent comments from the CFO that future margins would increase more slowly than usual,” said Blackledge, explaining the reasons for the reduced share price target.
The expert also listed possible catalysts for Netflix shares. “We view the third quarter results and fourth quarter 2023 guidance as near-term catalysts, as well as progress related to the ad-supported tier and paid sharing initiatives,” he wrote. “Further price increases in one of the company’s main markets could also act as a catalyst.”
Goldman Sachs analyst Eric Sheridan, who has a neutral rating on Netflix, cut his price target by $10 to $390 on Oct. 8, expressing mixed expectations. He raised his forecast for third-quarter subscriber growth to 6.3 million from 6 million and raised his estimate for gains in the U.S. and Canada to 1.1 million from 900,000. This brings its subscriber expectations above average Street estimates “as a mix of continued password crackdown execution, relative strength versus competition in terms of breadth and depth of content on the platform (against a backdrop of strikes), and varying price points drive demand.” “, “explained the expert.
He added that his estimate updates also reflect trends such as “higher net increases, largely driven by Asia Pacific, with third-party data pointing to higher net increases in emerging markets” and “slightly lower average revenue per member in the near term, reflecting higher Net increases reflect “mix of emerging markets and elements of spindown activity (at lower prices), partially offset by expected price increases from 2024, with markets expected first in the US/Canada and Europe, Middle East and Africa.”
Like others on Wall Street, the Goldman Sachs expert wondered whether Netflix executives would comment on expected price increases in the new year. “Throughout the duration of the strikes, recently resolved by the WGA, there have been concerns about Netflix’s pricing power and the potential to increase prices in 2024 as the release of new content for US television series and films slows.” Sheridan explained. “However, recent press reports indicate that Netflix plans to return to its normal price increase cadence following resolutions with WGA and SAG-AFTRA.”
Overall, the analyst maintained its Neutral rating, emphasizing that this “reflects the continued low visibility into the timing/duration of Netflix’s paid sharing and ad-supported initiatives and the short- to medium-term impact on unit economics. “”
In a report on Friday, October 13, MoffettNathanson analyst Michael Nathanson maintained a “neutral” rating on Netflix but lowered his stock price target from $380 to $325. “Over the past year, Netflix has become a story stock again, fueled by the market’s once-unbridled optimism about two new revenue opportunities: 1) the introduction of an advertising tier; 2) converting password sharing accounts into fully paying subscribers,” he explained. “While we – and the company – urge caution given the slow growth in advertising revenue, the ability to convert the 100 million global password sharing accounts into revenue-generating users has sparked widespread debate about future growth, with opinions ranging from large to large very big (count us in the former camp).”
To assess password crackdowns given Netflix’s limited disclosures, the research firm partnered with Publishers Clearing House to survey 19,000 Americans ages 18 and older. “A large percentage of the password sharing base does not seem interested in switching to paid accounts. “In addition, the move to restrict password sharing appears to create negative brand equity,” Nathanson summarized the findings. “Of the 30 million North American password-sharing users exposed to a raid, perhaps 22 to 32 percent will become new paying subscribers – or 6 to 9 million.”
The MoffettNathanson expert argued that the streamer could only make a potential profit in the first quarter or so. “Net-net, while this may not be the home run the bulls may think it is, the near-term opportunity to add more subscribers in North America seems very likely,” Nathanson concluded. “However, given management’s recent comments on long-term margin and ARM expansion, we are significantly reducing our long-term outlook.”
Meanwhile, Wedbush analyst Michael Pachter remains more optimistic than others on the Street. In a recent earnings preview report, he reiterated his “outperform” rating, his $525 share price target and the “Best Ideas List” designation for Netflix stock. He forecast global net paid subscriber growth of 5.5 million, compared to the streamer’s forecast for gains that were “roughly in line” with the second-quarter gain of 5.892 million subscribers and a Wall Street consensus of just over 6 .0 million stand.
“We maintained our third quarter EPS estimate of $3.52, in line with guidance and consensus,” Pachter emphasized. “Given that Netflix’s crackdown on password sharing continued to gain users at virtually no additional cost, and that content costs were depressed again in the third quarter, similar to the second quarter, due to the labor strikes, “Our estimate of earnings per share is quite likely to be positive.”
Wedbush commissioned a consumer survey targeted at the U.S. market, with Pachter noting that “quarterly survey results are encouraging and suggest upside potential in the fourth quarter.” Among his findings, he said: “The share of subscribers at the ad-supported tier remained constant in the third quarter, but we expect this share to increase in the fourth quarter and beyond.”
Plus: “Netflix continues to benefit from former account sharing users, at least 10 percent of whom chose to pay more for the extra member feature after the crackdown, resulting in higher average revenue per user (ARPU). “, emphasized Pachter. “Another 10 percent of former account sharers gained additional members,
Many of them have already signed up or will open their own accounts in the coming quarters.”
Pachter, a former Bear, remains bullish on the streamer’s stock: “We believe Netflix is well-positioned in this cloudy environment as streamers shift strategy and should be valued as a highly profitable, slow-growing company.”
In one of the latest previews on October 12, Wells Fargo analyst Steven Cahall combined long-term bullishness with a more cautious price target. While he maintained his “overweight” rating on Netflix, he lowered his stock price target by $40 from $500 to $460 under the heading “reset expectations.”
“Netflix will invest in advertising technology and content, which will reduce margin expansion but also increase revenue,” the Wells Fargo analyst wrote. “We are below average for the upcoming fourth quarter guidance, but buyers are patient.”
Cahall cut its earnings per share estimates for 2023, 2024 and 2025 by 2 percent, 5 percent and 9 percent, respectively. “However, we believe that the upcoming underlying price increases will boost ARM’s 2024 revenue to +15 percent YoY, +6 percent YoY,” from 6 percent and -1 percent according to its 2023 estimates, the expert wrote . “As investments bear fruit over the course of the year, estimates are increasing.”
Cahall’s conclusion: “We believe long-term investors should buy any weakness after earnings.”
In the Netflix earnings call, the Wells Fargo analyst not only pointed out that everyone was interested in management comments on the actors’ strike and the expectation of a return to regular production work after the strikes, but also on contracts with Hollywood Giants should pay attention to color in potential content licensing opportunities. “We are seeing more and more content coming to market, with the success of (former US series) Suits on Netflix representing a paradigm shift that underlines how much more valuable the library can be on the leading platform,” Cahall wrote. “We believe Friends, HBO library titles and even Disney content could come to market.”