Wall Street reviews of Netflix’ latest earnings ranged from upbeat to more cautiously optimistic, with the latter taking hold today after a major jump in net new subscribers failed to ignite sales last quarter.
Asked why, co-CEOs Ted Sarandos and Greg Peters and CFO Spencer Neumann said they expect a revenue boost from newly launched paid sharing, which just started in May, and from the ad-tier that launched last fall, will be gradual and roll out in coming quarters. But uncertainty on the timing combined with an already frothy share price saw Netflix stock dip after hours Wednesday and lose ground today. It’s trading down almost 9% at $435.
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Netflix reported yesterday it added 5.9 million new subscribers for the second quarter ended in June – smashing forecasts. Revenue rose 2.7% to $8.2 billion.
“Given the sheer number of unknowns, it is hard to have any conviction to the upside or to the downside,” research firm MoffettNathanson said in a note on the numbers, reiterating a “market perform” rating and price target of $380. “While the growth of Netflix 1.0 (pre these strategic shifts) had clearly begun to stagnate, investors seem willing to dream the dream that Netflix 2.0 will now be able to reignite faster revenue growth. That is clear just by looking at the stock price, which is up over +60% year-to-date (vs. +17% for the S&P500). And yes, we have become more optimistic in our outlook for Netflix alongside the market,” wrote Michael Nathanson. “Yet, given all of the unknowns and our lack of conviction in this time of constant change, for now we remain cautiously optimistic.”
Tim Nollen of Macquarie has a “neutral” rating and a $410 price target. “Q2 was an even bigger cliffhanger than usual given the launch of the paid sharing plan in May,” he said. Netflix delivered on sub growth but average revenue per member, or ARM — the streamer’s version of ARPU (average revenue per user) — was down quarter-over-quarter in every region, “including surprisingly UCAN [U.S./Canada], where the paid sharing launch presumably led to higher revenues, and ad tier subs also should have helped given they contribute higher ARM than the standard ad-free plan.”
“We are optimistic on the upside potential to subs, revenue and earnings from paid sharing efforts and its ad tier, but are conscious of the time it will take for these to contribute,” he said. “We also note valuation of NFLX stock at more than 20x EV/EBITDA, above many internet peers.”
Nathanson said Netflix is currently trading on 25x 2025E earnings per share, close to the P/E valuations of global tech giants Microsoft and Apple.
A more bullish Jason Helfstein of Oppenheimer has an “outperform” rating on the stock and a $515 price target. The “slow roll” of paid sharing was a surprise to investors, he said, but thinks management “is deliberately timing the impact to premium subs around seasonal usage, content launch, and impact of strike on linear TV in Sept.”
“We believe NFLX‘s initiatives such as password sharing rules, advertising and optimizing subscriber plan choices will drive subscriber growth and average revenue per membership (ARM), therefore leading to higher revenue. Despite increased competition, NFLX remains the dominant streaming platform and maintains the largest market share of US TV viewership. We believe NFLX’s dominance will continue, given its clear advantage in producing high-engagement content and monetizing that content more effectively than peers.”
Alicia Reese and Michael Pachter of Wedbush also have an “outperform” on the stock with a $525 price target on increased confidence of Netflix “ability to drive revenue growth from its password sharing crackdown, and to drive free cash flow substantially higher.”
Netflix said it expects $5 billion in free cash flow this year, up from $3.5 billion last. The jump is due in lare part to the writers and actors strike halting production. That could reverse next year if a deal is reached. Analysts didn’t devote much ink to strikes by the WGA, ongoing since early May, and SAG-AFRA, which started last week. The biggest and most international streamer is seen as in the best position to weather the work stoppage and take share from rivals. Sarandos insisted yesterday he is “super committed” to reaching a deal.
“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,” Webush wrote.
Jessica Reif Erlich of BofA is among the most bullish, with has a “buy” rating and a $525 target – up from $490 pre-Q2 earnings — “due to the initial success of password sharing, giving us increased confidence in the long-term trajectory of the business.”
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