How Long Can Netflix Keep Beating Earnings and Subscriber Expectations?

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As a seasoned technology analyst with over two decades of experience in the industry, I have closely followed Netflix‘s transformation from a DVD rental service to a global streaming entertainment powerhouse. The latest quarterly results and updates from the company once again piqued my interest, and I was eager to share my perspective based on my extensive background in analyzing tech companies and trends.

In the second quarter of this year, Netflix surpassed financial and subscriber growth predictions from Wall Street, reporting a total of 285 million worldwide subscribers after adding 8 million new members. This announcement was made on July 18. However, Netflix executives anticipate slower growth in the upcoming quarter, forecasting fewer new paid subscriptions compared to the previous year. This is due in part to the positive impact of their password-sharing policy crackdown, which began around a year ago and has already yielded significant results.

At the same time, Ted Sarandos and Greg Peters, who share the CEO role at Netflix, talked about the prospective advantages of artificial intelligence that generates content during their financial discussion. Additionally, they provided information on Netflix’s advertising plan, which has been active for 18 months and now contributes to approximately half of all new subscriptions in relevant markets.

After the earnings release, Wall Street analysts had a lot to consider, particularly since some of them had increased their stock price targets just beforehand. On Friday morning prior to market opening, Netflix’s shares remained relatively stable, with a slight rise of approximately 1 percent.

Some analysts believed the outcomes didn’t significantly alter their financial predictions or opinion regarding the stock, while others raised their target prices.

BMO Capital Markets analyst Brian Pitz was among those maintaining a positive outlook. He kept his “buy” recommendation and raised his earnings projections, lifting his predicted share price from $713 to $770. According to Pitz, Netflix is projected to surpass the 50 million mark for subscribers of its ad-supported tier by the end of 2024. The analyst expressed approval for Netflix’s efforts in gaming as well. “We commend management’s game strategy,” he penned down. “Netflix is slated to roll out a new multiplayer Squid Game offering before the end of 2024. The gaming sector represents an underestimated long-term possibility, with a potential market value of $150 billion. … Netflix intends to introduce one new game title each month for Netflix Stories. We appreciate management’s increased investment in game content, considering the significant intellectual property connections, added user engagement, and favorable economics.”

Mark Mahaney, an analyst at Evercore ISI, raised his estimated Netflix stock value by $10 to $710. In his assessment of the company’s recent earnings report, he titled it “Impressive Quarter: Overcoming the Worst-Case Scenario.”

Based on my experience working in the tech industry and following the trends in streaming services closely, I strongly believe that Netflix’s user growth is nothing short of remarkable. Mahaney’s takeaways highlight four key factors that are poised to boost the company’s revenue in the second half of this year and beyond:

An Evercore ISI analyst pointed out that Netflix’s profits are significantly increasing, and they detected a firm pledge to continued profit growth in fiscal year 2025 and the following years.

In conclusion, Mahaney boasted about an exciting lineup of content ahead – a hat tip to co-CEO Ted Sarandos for his memorable three-minute rundown of upcoming Netflix productions during the earnings call. From the renewal of “Emily in Paris” and “Squid Game,” to anticipated events like the Tyson-Paul brawl and the “Chestnut vs. Kobayashi: Unfinished Beef” special, Sarandos highlighted a diverse range of programs set for release in various international markets. As Netflix continues to expand its offerings, including live sports, it is transforming into a true television network.

Macquarie analyst Tim Nollen raised his price target for the stock from $685 to $695, predicting it would reach this new level. He maintained a positive outlook, stating that the company’s fundamentals are strong. However, he emphasized the importance of considering the long-term potential rather than being swayed by short-term fluctuations. Additionally, Nollen advised Netflix to focus more on expanding its advertising business.

Sanford C. Bernstein analyst Laurent Yoon raised his forecast for Netflix’s stock price by $25 to $620, keeping his assessment as “market-perform” in a report titled “Have We Seen This Script Before?”

In a surprising turn of events, reaching the seemingly unattainable goal of 30 million new members in ’24 is now within reach. This equates to over 11% expansion from the previous year, despite the modest subscriber growth projections for the third quarter. The achievements of ’24 serve as a foundation for future forecasts, and as a result, we’re revising our estimations upward once more.

Additionally, MoffettNathanson analysts Robert Fishman and Michael Nathanson kept their assessment of Netflix at “neutral” but raised their predicted price by $5 to $570 in a report named “What’s the Next Phase?” of expansion.

The duo expressed that they hold a neutral stance towards Netflix, neither bulls nor bears. They acknowledge Netflix’s success as a streaming leader in the current market. However, for significant growth from the current stock price, one must believe there are untold factors that will contribute to the company’s success beyond what is already known.

According to MoffettNathanson analysts, the main drivers of growth for Netflix are advertising and price increases. However, they cautioned that Netflix needs to demonstrate its ability to successfully expand its advertising business, which may take some time as the company has stated it won’t be a significant revenue contributor this year or in 2025. Regarding price hikes, analysts noted that increasing revenues from consumers outside the US can be challenging due to the abundance of streaming platforms available domestically. Netflix must strike a balance between charging more and minimizing customer cancellations.

At the same time, Kenneth Leon, an analyst at CFRA Research, maintained his “buy” recommendation with a projected stock price of $725. He reasoned that while the share price might be temporarily affected by Netflix’s forecast for third-quarter revenue of $9.7 billion instead of the anticipated $9.8 billion, he believed this short-term perspective failed to acknowledge the profitable growth we anticipate in the future.

John Blackledge, an analyst at TD Cowen, kept his recommendation as “buy” and set a target price of $775. He justified this decision by stating, “The robust content lineup and subscriber engagement during the second quarter surpassed expectations. Notable releases included original shows like ‘Bridgerton’ season 3, ‘Queen Charlotte’, and ‘Asunta Case’. Additionally, films such as ‘Atlas’ and ‘Hit Man’ also attracted viewers. The net additions exceeded our estimates across all regions during the quarter.”

Management anticipates that the number of new users added in the third quarter will be less than the 8.8 million gained during the same period last year due to the decrease in sign-ups resulting from the password-sharing clampdown, according to Blackledge’s statement.

The expert pointed out one issue that could impact the company’s revenue increase. According to the management’s forecast for the third quarter, revenue is projected to be $9.73 billion, representing a 13.9% growth from the previous year. However, this figure is about 1.9% or 0.8% lower than our and the consensus estimates. It’s important to mention that the management’s revenue projection includes a approximately 5% negative impact due to foreign exchange rates, mostly caused by Argentina’s currency devaluation.

Ralph Schackart, an analyst at William Blair, maintained his “buy” recommendation for Netflix without specifying a particular stock price. He expressed optimism that Netflix’s new ad-supported tier and paid sharing features would boost revenue in the near future. In his opinion, Netflix remains a strong contender in the streaming industry and he is confident that investors will eventually be satisfied with the company’s pricing adjustments.

Jeff Wlodarczak, an analyst at Pivotal Research Group, remains bullish on Netflix. In a recent report titled “This Is What Winning Looks Like,” he maintained a maximum $800 price tag and urged investors to buy, referring to the streaming giant as the global leader in entertainment platforms.

The business is a self-reinforcing process for Netflix, according to the analyst’s perspective. They pointed out that Netflix is showing significant growth in subscribers and generating substantial cash flow, which enables them to invest further and expand their offerings (like the WWE agreement and NFL Christmas Games). Meanwhile, their competitors are reporting heavy losses and underwhelming subscriber numbers.

Wlodarczak remarked, “Keep in mind that more and more of our peers have started selling their once exclusive library content to Netflix. While this may not be essential for Netflix, we think other streaming services will have no other option but to continue doing so to boost their own disappointing returns on streaming and expand their reach to Netflix’s over 500 million global viewers. This move adds value to Netflix’s service, enabling them to attract more subscribers, reduce cancellations, and increase average revenue per user.”

Netflix’s latest results and updates also once again drew commentary beyond Wall Street.

At the same time, Paolo Pescatore, an analyst at PP Foresight, expressed this perspective in a note “Netflix’s Growth Persists, but Uncertainties About the Future Are Emerging.”

As a gamer, I’d put it like this: “Netflix’s Q2 earnings for 2024 looked promising initially, but upon closer inspection, some hidden challenges have emerged. One of these issues is their new ad tier. After more than a year and a half, I’m convinced that Netflix’s entry into advertising is taking longer than expected. Recent developments have even forced the company to scale back its lofty goals.” The analyst added, “Netflix openly admits that they don’t foresee advertising being a major revenue booster until at least 2026.”

According to Pescatore, the streamer’s foray into advertising presents a tough hurdle for short-term and medium-term success. Notably, they’re competing against tech giants like Amazon, Google, and Meta, who have vast user bases that Netflix currently lacks. These companies have already amassed large audiences, making it difficult for Netflix to catch up since they’re starting from scratch.

He also expected more from Netflix’s games push at this stage. “It is unbelievable to think that it has been three years since it started this venture,” Pescatore wrote. “It is hard to see how games is driving subscriber growth or engagement. Netflix is still seeking to bolster its presence, understand the space, and is still experimenting with new formats.”

Analyst Jamie Lumley from Third Bridge maintains an optimistic outlook for Netflix, acknowledging that there are still improvements needed in terms of advertising. He emphasized, “Netflix’s subscriber growth model remains effective.” The company is managing to strike the right chord between enhancing operational metrics and delivering a satisfying viewing experience. Lumley pointed out that the number of subscribers opting for the ad-supported tier has expanded by 34% compared to the initial quarter, signifying its significance in the growth strategy. Nevertheless, this segment needs to demonstrate its financial potential.

According to Lumley’s Experts, Amazon has created a significant impact in the advertising market, while Netflix should focus on expanding its presence to become a major force.

I’ve followed Netflix’s growth closely over the years, and my perspective on the company remains optimistic. Recently, Netflix reported earnings that surpassed expectations, emphasizing its impressive profitability. As an experienced investor, I’ve witnessed the industry-leading 27% operating margins that Netflix boasts, leaving competitors in awe as they strive to reach similar heights. The consistency and resilience of Netflix’s business model continue to leave a lasting impression on me.

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2024-07-19 17:25