Netflix Inc. sees a more upbeat path ahead after two straight quarters of subscriber losses, but the company’s increasingly complicated story continues to give some analysts pause.
Opinion: Netflix has a different pitch for Wall Street, as subscriber growth hits a wall
Netflix is taking steps to shore up both sides of the equation. It’s promising new initiatives on password sharing and advertising-based streaming that could bring more subscribers into the fray. In addition, after years of ramping up spending on content, Chief Financial Officer Spencer Neumann said on Netflix’s earnings call that the company anticipates it will spend $17 billion on content this year while staying in the same “zip code” in future years.
Read: What a Netflix crackdown on password sharing could look like
In many ways, MoffettNathanson’s Michael Nathanson sees Netflix’s current predicament as not particularly unique in the history of the media industry.
“Over our career as media analysts, we have grown comfortable with the idea that the end state of our consumer-facing businesses usually starts with slowing unit volume growth that it is offset by higher than CPI pricing gains,” he and his team wrote in a note to clients.
Offering examples like U.S. pay TV, broadband, and theatrical attendance, he noted that “[u]sually when these businesses hit that wall of slowing unit volume growth, the equity markets typically convulse and crush the stock as value investors start to circle trying to determine where steady-state cash flow normalizes and whether or not all the risks are priced in.” In his view, now “that is the case of Netflix.”
While acknowledging that the latest quarter wasn’t as bad as analysts and the company had been expecting, Nathanson still had some concerns about Netflix’s various initiatives. He pointed to paltry subscriber growth in the U.S. and Europe, the Middle East, and Africa—the company’s most lucrative regions in terms of revenue per user—saying that as Netflix conducts price hikes, “the realistic worry is that the company will be hard pressed to materially reaccelerate growth in these regions.”
From a financial perspective, he also thinks the company needs to slow content spending, but the streaming market could be different than other media markets in terms of how such a move would play out.
“When Pay TV growth or DVD slowed, the hit to underlying economic models forced all market participants to re-assess their level of spending,” Nathanson wrote. “In streaming, the risk is that a slowdown in content investment at Netflix could lead to even slower revenue growth as the creation of ‘hits’ is often a random walk,” though “not every decision to reduce content investment has been met with fewer hits.”
He rates the stock at neutral and cut his price target from $210 to $190.
Netflix shares have taken a recent beating, falling 67% so far this year as the S&P 500
SPX,
has dropped 17%. The stock, which recently changed hands near $213, is far off its November 2021 high of $691.69, but Netflix is at least moving closer to reclaiming a spot in $100 billion territory after Tuesday’s results. It is currently valued near $94 billion.
Still, Evercore ISI’s Mark Mahaney suggested it could take some time before investors are willing to give Netflix a substantial valuation boost.
Mahaney sees many positives ahead for Netflix, including its free-cash flow trajectory and its positioning in the market. “But we believe the market will need to see real success from the ad-supported and password-sharing initiatives before ascribing a sustainably premium multiple to NFLX,” he wrote. “And we don’t think evidence of this success will be apparent until late ’23.”
He rates the stock at in-line with a $245 price target, writing that Netflix is “a potential Long, but a potential ’24 Long.”
Netflix sounded less dire in its discussion of subscriber trends this time around, but the company’s beat on the metric and projection of future growth failed to wow several analysts.
“The company, once a juggernaut, celebrated that net subs only fell 1 million to 220.7 million, half of the guided 2 million decline,” wrote Rosenblatt Securities analyst Barton Crockett, who has a neutral rating on the stock but boosted his price target to $201 from $196. “This was such small variance on such a large base as to seem more noise than substance, although Netflix was able to credit strength in Stranger Things 4.”
Macquarie’s Tim Nollen noted that while Netflix’s third-quarter subscriber forecast assumes growth, it was still below the consensus view. Meanwhile, the company’s commentary on the call indicated that investors will have to wait a bit longer to realize benefits from the forthcoming ad tier.
“[T]he new tier won’t launch until sometime in ‘the early part’ of ’23 – i.e. not as early as previously signaled in Q4, meaning we won’t see any numbers on this until as much as a year from now,” Nollen wrote.
He acknowledged that the stock could see “a short relief rally” given management’s “much more reassured” tone on the call, but questions linger. “[T]here is still some way to go to turn numbers around, while sub adds are only tracking to flat through Q3, and we don’t know what the effect of a recession may be on subs.” He rates the stock at underperform while boosting his price target to $170 from $150.
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Other analysts were more upbeat, including Stifel’s Scott Devitt, who upgraded the stock to buy from hold in a note titled: “Every Ending Is A New Beginning.”
“With signs of stabilization in the subscriber base emerging, we believe the prospect of a prolonged period of subscriber losses is becoming increasingly unlikely,” he wrote. “Investor focus can now appropriately shift to the viability of Netflix’s growth initiatives, including monetizing password sharing and the introduction of ad-supported tiers, both of which will be introduced next year.”
