Netflix Stock: Analysts Adjust Expectations Before Q3

Netflix Stock

Netflix (NASDAQ:NFLX) is anticipated to reveal robust subscriber gains in its upcoming quarterly results on October 18. Despite this optimism, Netflix stock has been underperforming since the July earnings update, where it added 5.9 million subscribers, bringing the total to 238.4 million global paid memberships. Investor sentiment has been influenced by cautious comments from Netflix management regarding the growth of its nascent advertising segment and profit margins. Netflix acknowledged the challenges of building an advertising business from scratch.

Additionally, the possibility of increased spending on licensed content and the impact of Netflix’s crackdown on password-sharing have raised questions among analysts. As a result, some have revised their earnings forecasts and reduced their stock price targets. They believe that Wall Street’s near-term expectations may have become overly optimistic.

The stock has faced a 22% decline since the July earnings report, while the S&P 500 dipped 7%. Nevertheless, year-to-date, Netflix’s stock is still up around 20% as of October 13.

One of the key points of debate among investors is Netflix’s Average Revenue Per Member (ARPU). The focus is on how strong subscriber growth in international markets with lower ARPU and the impact of password-sharing crackdowns affect this metric. Analysts argue that despite the potential for more crackdowns, sharers don’t make ideal members. Netflix’s guidance for Q3 suggests a dilutive tier trading, which might impact the stock despite higher subscriber numbers but lower ARPU.

Netflix’s CFO Spencer Neumann mentioned that the company is in the early stages of developing its advertising business, which suggests gradual growth. He also indicated that margin growth would be gradual as they invest in growth opportunities. Netflix aims to achieve an 18-20% operating margin this year. The CFO emphasized the need to balance revenue growth with investments in addressing larger markets.

Analysts Cut Netflix Stock Price Targets

Morgan Stanley’s Ben Swinburne trimmed his Netflix stock price target by $20 to $430, expressing concerns that consensus estimates and stock valuation are overly optimistic. He pointed to several risks, including the potential impact of password sharing crackdowns and advertising tier expansion on subscriber growth.

Similarly, TD Cowen’s John Blackledge reduced his stock price target by $15 to $500, mainly due to Netflix’s longer-term financial outlook and a slower-than-expected margin expansion. Despite maintaining an “outperform” rating, he mentioned that expectations for margin expansion were now more gradual.

Goldman Sachs analyst Eric Sheridan also lowered his stock price target by $10 to $390. He expects Q3 subscriber growth to exceed estimates, driven by the ongoing password-sharing crackdown and content depth on the platform. However, he expressed concerns about the timing and duration of Netflix’s paid sharing and ad-supported initiatives.

MoffettNathanson’s Michael Nathanson maintained a “neutral” rating but reduced the stock price target from $380 to $325. He highlighted Netflix’s efforts to convert password-sharing accounts into paying subscribers but also noted that this may not yield the expected results. Nathanson believes that the opportunity for growth in North America remains significant.

Wedbush analyst Michael Pachter, more bullish than others, reiterated an “outperform” rating and a $525 stock price target. He forecasts global net paid subscriber growth of 5.5 million in Q3 and anticipates upside to earnings per share due to Netflix’s password-sharing crackdown and suppressed content costs.

Wells Fargo’s Steven Cahall retained an “overweight” rating but reduced the stock price target by $40 to $460. He emphasized that Netflix’s investments in ad tech and content would reduce margin expansion but accelerate revenue. Cahall believes that as these investments bear fruit, Netflix’s long-term outlook remains positive.

In summary, analysts are adjusting their expectations for Netflix’s Q3 earnings, with concerns surrounding ARPU, password-sharing crackdowns, and ad-supported initiatives. Despite varying opinions, they all agree that the streaming giant continues to hold potential for growth. Investors and analysts will closely monitor Netflix’s future updates on its earnings call, including insights into content licensing opportunities and the impact of the actors’ strike.

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About the author: Stephanie Bedard-Chateauneuf has over six years of experience writing financial content for various websites. Over the years, Stephanie has covered various industries, with a primary focus on tech stocks, consumer stocks, health stocks, and personal finance. This stock lover likes to invest for the long-term. Stephanie has an MBA in finance.