Monday, December 23, 2024

Netflix Earnings Preview: Wall Street Is Bullish on Streaming’s “Default Choice”

Must read

This Thursday, it’s time for investors to Netflix. If it’s also time for them to chill, only time will tell! Much of that will depend on the financial and subscriber trends the global streaming giant reports after the stock market closes on July 18.

Netflix shares have been on a roll this year. They are up around 12 percent since the firm’s first-quarter earnings report in mid-April and up 41 percent for the year to date, compared with a 17 percent gain for the broad-based S&P 500 stock index.

But Netflix management previously guided that its second-quarter subscriber growth will come in below the 9.3 million adds recorded in the first quarter, which had been an upside surprise. It is also likely to discuss the success of the firm’s second-quarter content slate, including such series as Ripley, starring Andrew Scott, Eric with Benedict Cumberbatch, and at the end of the quarter, London-set superpowers drama Supacell, along with such films as Scoop and Zack Snyder’s Rebel Moon — Part Two: The Scargiver.

Still, ahead of Thursday’s earnings update, several Wall Street analysts have increased their stock price targets, mirroring a trend seen before the company’s first-quarter results.

MoffettNathanson analysts Michael Nathanson and Robert Fishman on Monday boosted their Netflix stock price target by $35 to $565 and reiterated their “neutral” rating.

“For the second quarter, we are raising our Netflix global net paid subscriber addition estimate by 500,000 to 5.5 million driven by an improved U.S./Canada subscriber addition estimate of 2.0 million (versus 1.5 million previously),” the MoffettNathanson analysts explained. “As a result of our improved 2025 earnings per share estimate ($22.35 versus $22.25 previously) and a higher market multiple, we raise our Netflix price target.”

Netflix has made “significant progress in its password-sharing crackdown,” the report also highlighted, “with [the] share of users reporting accessing the platform through another household’s account dropping from 15 percent when the crackdown began a year ago to just 9 percent this past quarter.” The analysts argued that “while there are clearly more accounts to clamp down on, we imagine the lowest-hanging fruit has already been picked.”

Fishman and Nathanson also emphasized the streaming giant’s recent momentum in a key area, writing: “A promising sign for both Netflix’s ability to get password-sharers to convert to paid subscribers (and for its ability to drive pricing and generate ad inventory) is the meaningful increase the platform saw in users reporting daily engagement.”

Another more bullish forecast than before came from Bank of America analyst Jessica Reif Ehrlich on Monday, who pushed up her stock price target from $700 to $740 while reiterating a “buy” rating on Netflix in a report entitled “Well suited for healthy subscriber growth.” She noted that “our bias is toward the upside for our net adds and revenue forecasts of 4.6 million/$9.49 billion. Additionally, we anticipate a significant advertising ramp in ’25 and ’26.”

Reif Ehrlich suggested that “long-term drivers [are] still intact,” writing: “Netflix shares are up over 16 percent since April 19 (the day after reporting first-quarter earnings), which we believe is driven by: 1) third-party data sources indicating healthy subscriber acquisition trends, 2) greater appreciation for the company’s enviable market position within the media ecosystem given their significant scale advantage in streaming while also not needing to protect a secularly declining linear asset, and 3) optimism around the potential in advertising – particularly in light of several announcements for live/sports programming (e.g. NFL on Christmas).”

Concluded the expert: “Overall, these dynamics support our bullish thesis for longer-term potential which we expect will be driven by healthy revenue growth, continued margin expansion, and outsized free cash flow growth over the next several years.”

Benjamin Swinburne, analyst at Morgan Stanley, also elevated his Netflix stock price target on Monday, in his case from $700 to $780 and reiterated his “overweight” ratings. The expert also raised his subscriber net add estimate to 7 million in the latest quarter taking his full-year 2024 projection to more than 30 million.

“Our analysis of Netflix engagement data continues to show it is in a league of its own, specifically the strength of international content and depth of consumption,” he wrote. “Strong core execution, paid sharing, and ad tiers that help penetrate more price-sensitive cohorts are contributing to a potential record net adds year in ’24.”

That said, Swinburne also argued that “Netflix advertising remains unproven, 18 months-plus in,” adding: “It has a lot of work ahead to scale ads. We believe its goal should be to build a better YouTube, not a better CBS.”

So why is the Morgan Stanley analyst this bullish? “For Netflix shares, much is priced in but we remain bullish given the still-large opportunity for growth ahead,” he explained. “We are admittedly paying in Netflix [a] multiple for the track record this management team has built over two decades navigating disruption and exploiting opportunities. However, the combination of 1) the still-large opportunity ahead (Netflix has less than 10 percent of TV time even in its more mature markets, 2) the track record of innovation and execution over multiple cycles, and 3) the benefits that accrue from scale, free cash flow generation, and a strong balance sheet which stand in sharp contrast to competitors that are largely
retrenching, keep us ‘overweight’.”

TD Cowen analyst John Blackledge in a July 9 report also raised his full-year 2024 subscriber estimate for Netflix and raised his stock price target from $725 to $775. Reiterating his “buy” rating, he predicted second-quarter user net adds of 5.19 million, noting that this was above the 3.72 million Wall Street consensus at the time.

“We think investors will look for updates around Netflix’s burgeoning ad tier, paid sharing efforts, and second-half content slate,” the analyst highlighted. “Netflix continues to benefit from paid sharing initiatives, strong underlying biz demand, and burgeoning ad tier.” With the streamer retiring its basic tier in the U.K. and Canada, Blackledge said that this “should drive further ad tier momentum.” 

He also highlighted a TD Cowen survey and its findings. “We asked our surveyed consumers which platform they use most often to view video content on their TV, and Netflix retained the top spot in the second quarter with 23 percent of respondents, followed by YouTube (15 percent) and basic cable (12 percent),” Blackledge summarized before concluding: “We think Netflix’s broad catalog across multiple genres creates a durable advantage over time.”

KeyBanc analyst Justin Patterson was also among the Wall Street experts boosting their Netflix stock price target ahead of Thursday’s earnings report. He pushed it from $707 to $735 while maintaining his “overweight” rating. His key takeaway: “Recent price increases by competitors and ongoing low rates of churn support Netflix price increases over coming quarters.”

JPMorgan analyst Douglas Anmuth also recently raised his stock price target on Netflix from $650 to $750, while sticking to his “overweight” rating. He expects the streamer to add 5 million-6 million net subscribers in the second quarter.

The expert pointed out the positives and the challenges for the streamer’s shares heading into the latest results. “Paid sharing has become a more normal course of business, but still remains impactful,” he noted. And he highlighted that “we remain positive” on them, “while also recognizing high expectations” ahead of the earnings update.

His overall bullish takeaway: “Netflix’s large scale, strong engagement, and diversified content will push Netflix toward becoming the default choice for how users consume TV, film, and other long-form content.”

Anmuth sees Netflix’s recent push into sports and sports-related content continuing over time, predicting: “We expect a bigger push into live sports over time, particularly as leverage continues to shift in Netflix’s direction.”

One Wall Street observer who didn’t change his Netflix stock price target is Wedbush Securities analyst Michael Pachter. Predicting second-quarter global net subscriber growth of 3.8 million, compared to what he cited as the consensus figure of 4.8 million, he continues to rate the stock at “outperform” with a $725 price target.

“The most significant benefit of the ad tier so far is that it limits churn,” Pachter wrote. “Netflix is positioning to accelerate ad tier revenue contribution into year-end and 2025 as it improves its advertising solutions and targeting, expands partnerships, and adds more live events.”

His conclusion: “Netflix has reached the right formula with global content creation, balancing costs, and increasing profitability. We believe Netflix will continue to expand profitability and generate increasing free cash flow.”

And Pachter reiterated his previously stated take that Netflix has emerged as the winner of the so-called “streaming wars.” Wrote the expert: “Netflix has managed to establish a virtually insurmountable lead in the streaming wars, and we expect competitors to continue to flail while trying to replicate Netflix’s business model.”

Despite increasing clarity on the impact of Netflix’s password-sharing crackdown and ad tier rollout, investors and analysts will keep their eyes and ears open for latest management commentary and guidance on Thursday’s earnings call with Netflix top executives on various emerging areas, including future sports plans.

They will also look for the latest management color on subscriber and ad trends, as well as the planned launch of two “Netflix Houses” in 2025 in King of Prussia, Pa., and Dallas, Texas. The immersive experiences will feature merchandise, food and experiential offerings tied to the streamer’s hits franchises, including Bridgerton, Stranger Things, and Squid Game.

Latest article