Netflix Earnings Preview: Analysts Bullish Despite a Warning of Unrealistic Expectations

by

As a seasoned analyst who has spent years observing the dynamic world of streaming services, I find myself intrigued by the current state of Netflix. The optimism from Piper Sandler, Guggenheim, Morgan Stanley, and even the bullishness of Pivotal Research Group is undeniably captivating. It’s like watching a gripping thriller where the underdog becomes the dominant player, leaving its competitors in the dust.

On Thursday, October 17th, when Netflix reveals its third-quarter earnings and subscriber numbers, with co-CEOs Ted Sarandos and Greg Peters, as well as executive chairman Reed Hastings leading the way, will investors find themselves relaxing or will discussions about the stock’s future become more intense?

A diverse range of original content from the worldwide streaming leader appeals to both romantic souls and adrenaline junkies. This is made possible by offerings such as Emily in Paris’s upcoming season 4, The Perfect Couple, Beverly Hills Cop: Axel F, A Good Girl’s Guide to Murder, and the concluding season of The Umbrella Academy.

Netflix concluded June with a global subscriber base of 277.65 million, having gained 9.33 million in Q1 2024 and an additional 8.05 million in Q2. The management anticipates third-quarter growth to be lower than the previous year’s figure of 8.76 million new subscribers.

On Thursday, when the streamer reveals its recent quarterly earnings and offers insights about its future direction, investors will be closely monitoring subscriber patterns, advancements in its lower-priced advertising tier, and developments in newer ventures like its Netflix Games division (which recently appointed Epic Games veteran Alain Tascan as president). They’ll also be looking for any hints regarding potential strategic decisions.

Approaching the upcoming earnings release, financial analysts largely maintained their optimistic outlook, with several even boosting their projected share prices. However, at least one analyst expressed doubts about whether Netflix’s stock has climbed too high given its significant increases this year. As a market expert stated on October 7th, by that day, Netflix shares had risen by 12% since the streaming service’s second-quarter earnings announcement and 48% year-to-date. In comparison, the broad-based S&P 500 stock index had only increased by 21%.

In his preview, analyst Doug Anmuth from JPMorgan expressed optimism about Netflix’s share performance leading up to their third-quarter earnings. However, he acknowledged that there are high expectations to meet. Despite this, he maintains a positive outlook, keeping his “overweight” rating and a stock price target of $750. He continues to be confident in Netflix’s potential to increase revenue by mid-teens in 2024 and 2025, low double-digits in 2026, while also expanding margins and driving multiyear free-cash-flow growth.

Analyst John Blackledge from TD Cowen maintained his positive stance on Netflix shares in a note dated October 7th, upgrading his predicted stock price to $820 – a $45 increase. In the report titled “Projected Continued Strong Member Growth and Rising Margins,” he projected a significant number of new subscribers, specifically 4.88 million, surpassing the industry’s estimated 3.9 million. This projection takes into account ongoing benefits from shared accounts, growth in ad-supported viewing options, and the inherent strength of the business itself.

Blackledge additionally highlighted favorable research outcomes, stating: “Our third-quarter consumer survey indicates that Netflix continues to be the preferred choice for home viewing.” However, the tone and gestures of management will once more play a crucial role in the upcoming earnings statement and during the management call. “Investors will seek fresh information regarding Netflix’s monetization strategy for its ad tier, its fourth-quarter content lineup, and underlying membership patterns,” he added.

On that very day, Kannan Venkateshwar, an analyst from Barclays, adjusted Netflix’s rating from “equal weight” to “underweight.” Despite this change, he maintained his predicted price of $550 per share. His decision was primarily based on worries about the company’s projected financial growth compared to its current market value.

In a report entitled “Growth algorithm getting more complex,” he highlighted: “Netflix’s premium valuation is predicated on revenue growth being at least in the low double digits for some time. We think this’ll get more difficult.” Added the expert: “Even if Netflix gets to its revenue goal, valuation implicitly prices in more than a doubling of sub base from [the] present level, which seems unrealistic.”

Venkateshwar contends that the recent actions such as the password-sharing restriction and ad tier implementation are pushing forward growth too quickly, resulting in exaggerated long-term expectations among investors. In essence, he suggests that the current valuation of the company does not align with its predicted growth trajectory.

The Barclays analyst pointed out that taking Netflix’s ad business to greater heights might involve some trade-offs. To counterbalance the sluggish pace of pricing and subscriber growth in the U.S., Canada, and Europe, as well as the two regions contributing most to Netflix’s expansion – the Middle East, and Africa – the company must significantly speed up the growth of its advertising revenue. This is according to the analyst’s emphasis.

Venkateshwar suggests that this change could lead the company to eliminate the fundamental plan in various markets, and eventually even the standard plan somewhere down the line, to widen the cost difference between the ad tier and non-ad tiers considerably. This, in turn, may compel more users to view ads. However, it’s challenging to envision this scenario without encountering its own drawbacks in terms of user engagement.

On the very same day, analyst Matt Farrell from Piper Sandler upgraded Netflix’s rating from “neutral” to “overweight.” This move increased his projected stock price from $650 to a whopping $800, and he emphasized Netflix’s dominance in the streaming industry.

Originally, our view had been unbiased regarding valuation, but now we acknowledge that the high price of the company is justified. The analyst also highlighted potential price rises and decreased risks in the company’s advertising sector, while expressing the opinion that the general forecast for Netflix’s profit margins in 2025 and 2026 might be overly modest.

Analyst Michael Morris from Guggenheim remains optimistic, boosting his 12-month stock price forecast to $810 while maintaining a “buy” recommendation. In a recent report, he stated that despite Netflix shares already having risen by 56% this year compared to the S&P 500’s 22%, there is still potential for substantial returns in the coming year. This is due to three key factors: firstly, the ongoing global growth of members, secondly, an increase in advertising revenue driven by tier adoption and expanded partnerships with third parties, and thirdly, continued leadership in content engagement which will lead to operational efficiencies and margin expansion, reaching around 35% over the next five years.

He anticipates that user tendencies will persist as the main factor influencing sentiment, given that the company is still reaping benefits from its early password-sharing strategies. As a result, he has raised his projected member net additions for the third quarter to 5.2 million, up from 2.5 million. This increase is based on our analysis of download data, which suggests a slower decline than we earlier predicted.

Morgan Stanley analyst Benjamin Swinburne titled his earnings preview for Netflix Inc as “Once Upon a Time… in Hollywood.” He maintained his optimistic outlook with an “overweight” rating and increased his price target to $820. His reasoning was that he remains optimistic about the long-term growth of revenue, higher-than-expected operating leverage and earnings per share, and strengthening competitive advantages for Netflix. Additionally, Swinburne emphasized that his analysis of Netflix’s latest engagement report, which featured a significant number of U.K.-produced shows, supports his bullish perspective.

Analyst Jeff Wlodarczak from Pivotal Research Group continues to be the most optimistic about Netflix among his peers. By the end of August, he boosted his already highest predicted stock price from $800 to an even higher target of $900 and maintained his “buy” recommendation. This decision was based on a shift in his projected year-end price for 2025 from the previous 2024 target. Additionally, he mentioned an expansion of his medium-term/long-term global subscriber forecasts to a total of 384 million subscribers by 2030, up from the earlier prediction of 370 million. This change reflects the continued robust performance of Netflix’s business and its relatively untapped potential in the global market.

His fundamental belief remains unchanged: “Netflix is undeniably the leading global streaming service for the immediate future, capable of sustaining robust subscriber expansion and increased average revenue per user (ARPU), as its existing vast scale continues to expand profit margins and yield substantial, healthy cash flow growth. This combination is incredibly potent.

Read More

2024-10-15 20:27