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Saturday, 20 July 2024

Hollywood Reporter: How Long Can Netflix Keep Beating Earnings and Subscriber Expectations?

Story from Hollywood Reporter:

Netflix beat Wall Street expectations with strong second-quarter financial and subscriber growth (8 million subscriber adds for 277 million in total worldwide) reported on July 18. But management forecast slower growth ahead — setting expectations for lower paid net additions next quarter compared to the year prior — partly because it has already reaped gains from its successful password-sharing crackdown, launched about a year ago.

Meanwhile, co-CEOs Ted Sarandos and Greg Peters discussed the potential benefits of generative artificial intelligence during their earnings chat and also gave updates on Netflix’s advertising tier, which has been in place for 18 months and now accounts for 45 percent of all signups in markets with that tier.

So Wall Street analysts had much to ponder after the earnings update, especially following stock price target hikes from several heading into the report. In pre-market trading Friday, Netflix shares were little changed, trending up around 1 percent.

Many analysts came away feeling that the results didn’t move the needle too much in terms of their financial expectations and view on the stock, but some more experts pushed up their price targets.

BMO Capital Markets analyst Brian Pitz was one of them. Reiterating his “outperform” rating, he increased his financial estimates and boosted his target stock price from $713 to $770. He estimates that Netflix will cross the 50 million ad-tier member milestone by the end of 2024. Pitz also praised Netflix for its gaming push. “We applaud management’s gaming strategy with a new multi-player Squid Game product launching by year-end 2024,” he wrote. “Gaming is an underappreciated medium-term opportunity with $150 billion [total addressable market]. … Management plans to launch one new title per month for Netflix Stories. We applaud an acceleration of game content investment, given deep intellectual property synergies, incrementality to overall engagement, and attractive unit economics.”

Evercore ISI analyst Mark Mahaney also increased his stock price target on Netflix, in his case by $10 to $710. “Against The Sum of All Fears, An Impressive Quarter,” he summarized his take on the streamer’s latest results.

He also shared his four top takeaways. “Netflix’s user growth is intrinsically very impressive,” Mahaney emphasized. “We still see four average revenue per user (ARPU) tailwinds in the second half and ‘

  • A) foreign-exchange headwinds will hopefully peak soon;
  • B) Netflix is rolling out international price increases, most recently in Germany, Brazil and Argentina;
  • C) ad monetization should ramp up as Netflix eventually gets its ads together – in-house ad tech platform, programmatic partnerships, real scale (i.e. 50 million) in terms of ad viewers; and
  • D) Netflix flexes Sunset Power – now removing the basic tier in the U.S. and France, and this should be nicely accretive.”

The Evercore ISI expert noted, “Netflix’s margins are soaring … and we picked up a clear commitment to ongoing margin expansion in fiscal year 2025 and beyond.”

Finally, Mahaney touted “an impressive content slate coming up – we give the Oscar for best executive recall on an earnings call to co-CEO Ted Sarandos, who finished the earnings call with a 3-minute tour-de-force of all the content coming up on Netflix, from renewals of Emily in Paris and Squid Game to the Tyson-Paul brawl to the Chestnut vs. Kobayashi: Unfinished Beef ‘special’ to hit programs in multiple international markets. With more and more content coming onto the network – including live sports – Netflix is increasingly becoming … TV.”

Another $10 stock price target boost, to $695 came from Macquarie analyst Tim Nollen who reiterated his “outperform” rating on Friday. “Fundamentals are solid,” he concluded. “Keep long-term potential in mind over any quarter-by-quarter fluctuations.” But he also highlighted: “Netflix has to step up its efforts to build out its ad business.”

Sanford C. Bernstein analyst Laurent Yoon also hiked his Netflix stock price target, by $25 to $620, while maintaining his “market-perform” rating in a report entitled “Have we seen this movie?”

“What seemed to be an almost impossible number to hit in ‘24 is within sight – 30 million net adds in ‘24, implying more than 11 percent member growth from ‘23 despite the cautious third-quarter sub growth guidance,” Yoon wrote. “Growth in ‘24 sets the baseline for longer-term projections, and, once again, we’re adjusting our estimates upward.”

Plus, MoffettNathanson analysts Robert Fishman and Michael Nathanson maintained their ‘neutral’ rating on Netflix but pushed their price target $5 higher to $570 in a report entitled “What’s the Next Leg?” of growth.

“While we may not be Netflix bulls, we are also certainly not Netflix bears,” the duo wrote. “The company has clearly and solidly cemented itself as a streaming winner in a streaming world. But in order to see meaningful upside from where the stock is today, one has to believe there’s more to the story than what we already know today.”

Concluded the MoffettNathanson analysts: “To us, the obvious growth catalysts from here are advertising and price increases. Yet, on the first piece, it is up to Netflix to prove it can effectively scale its advertising business, but it will take time with the company admitting this won’t be a primary driver of revenues this year or in 2025.” As for price increases, they warned: “We have seen over our years covering media how hard it is to grow monetization of consumers outside the U.S., and with the plethora of streaming platforms available domestically, Netflix must walk the tightrope of extracting more money from consumers while minimizing churn.”

Meanwhile, Kenneth Leon, analyst at CFRA Research, stuck to his “buy” rating with a $725 stock price target. “The share price may react negatively to Netflix’s guide for third-quarter revenue at $9.7 billion versus the $9.8 billion consensus, but we think this is myopic to the profitable growth we see ahead,” he explained.

TD Cowen analyst John Blackledge similarly maintained his “buy” rating and $775 stock price target. “Strong content slate and paid sharing drive second-quarter sub beat,” he explained. “Popular second-quarter releases included original titles, such as Bridgerton season 3, Queen Charlotte, and Asunta Case, as well as films like Atlas and Hit Man. Net adds beat our expectations across all regions in the quarter.”

The declining returns from the password-sharing crackdown led management to predict third-quarter user net adds will come in below the 8.8 million recorded in the year-ago period, “as Netflix laps the first full quarter of paid sharing,” Blackledge also noted.

And he highlighted one particular challenge set to affect revenue growth. “Management’s third-quarter guide calls for revenue of $9.73 billion, up 13.9 percent year-over-year, 1.9 percent/0.8 percent below our/consensus estimates,” the expert wrote. “Of note, management third-quarter revenue guide comprises a roughly 5 percent foreign-exchange headwind, largely due to Argentine currency devaluation.”

Ralph Schackart, analyst at William Blair, also stuck to his “outperform” rating without a stock price target. “While we believe the ad-supported platform is still in need of additional refinement, we remain optimistic that both this newer tier and paid sharing will provide tailwinds to the top line through the medium term,” he opined. “Overall, Netflix continues to be well positioned to remain a secular streaming winner, in our view, and we believe the pricing increases will eventually flow through the model to satisfy investors.”

Pivotal Research Group analyst Jeff Wlodarczak is also continuing to sing the praises of Netflix. “This Is What Winning Looks Like” was the title of his report, in which he reiterated a Street high $800 stock price target and his “buy” rating for what he called “the world’s dominant streaming entertainment platform.”

He sees the business as a virtuous cycle. “It is abundantly clear that Netflix is demonstrating massive scale as it continues to produce strong subscriber results and free cash flow with the ability to invest to accelerate that growth (through deals such as the ’25 WWE agreement and the ’24 Christmas NFL Games) while its streaming peers continue to generate substantial losses and generally mediocre subscriber results,” the analyst explained.

Wlodarczak added, “Recall, that increasingly those peers have resorted to selling their formally exclusive library content to Netflix. While not necessarily needed by Netflix, we believe other streaming players/media players will have no choice but to continue to sell their premium library content to Netflix to offset their own poor returns in streaming (and to tap into Netflix’s about 500 million-plus global viewers to increase the content value as we saw with Netflix’s carriage of Suits), which enhances the value of [the] Netflix service allowing them to drive higher subscriber growth, reduce churn and increase ARPU.”

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

Meanwhile, PP Foresight analyst Paolo Pescatore shared this take in the headline of his note: “Netflix Growth Continues Though Future Concerns Are Starting to Build.”

“While Netflix’s second-quarter 2024 earnings delivered good news at first glance, underlying issues are causing it to downplay growth for the rest of the year,” he argued. The ad tier is one area of concern for him. “18 months on I firmly believe that the move into advertising is taking Netflix far longer than anticipated. The latest developments have forced it to curtail its own grander ambitions,” the analyst wrote. “In fact, Netflix acknowledges that it does not expect advertising to be a primary driver of its revenue growth until 2026 at the earliest.”

The streamer’s push into advertising “highlights the short to medium challenge in cracking this space,” Pescatore suggested. “It is up against even bigger tech giants with a huge base and scale; Amazon, Google and Meta are three that come to mind. Significantly, these companies are way ahead in terms of eyeballs, figures that Netflix is finding hard to match given it is starting from zero.”

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.”

Third Bridge analyst Jamie Lumley sees things more positively but also noted that more has to be done on the ad front. “Netflix is showing that its subscriber growth strategy still works,” he suggested. “The company is continuing to find the right balance between optimizing its operational metrics and creating a quality experience for viewers. The ad-supported tier continues to be an important part of the subscriber growth story with a 34 percent larger base than in the first quarter. However, this segment has yet to prove itself from a revenue standpoint.”

Added Lumley: “Our experts highlight that Amazon has made a much bigger splash in the ad market, and Netflix needs to continue working on scale in this segment if it wants to be a major player.”

But his overall take on Netflix is bullish. “As investors prepare for the day when the company stops sharing subscriber numbers, Netflix has again highlighted the fundamental strength of its operating model by exceeding expectations for its industry-leading profitability metrics,” he concluded. “Competitors continue to gaze up enviously at Netflix’s 27 percent operating margins, knowing it will be a long time before they can get there themselves.”

© 2024 The Hollywood Reporter.