Netflix Earnings Show Wall Street’s Diverging Views On Streaming Growth Potential

Georg Szalai
·10 min read

Netflix and other big streaming services like to tout that they have something for everyone in their programming offering. Well, the same can be said about the global streamer’s first-quarter results and management’s outlook late on April 18 following much Wall Street talk about the company’s password-sharing crackdown and launch of an advertising tier.

Reporting earnings and other figures for the first time since Reed Hastings moved from the co-CEO to the executive chairman role, Netflix started the year by adding 1.75 million subscribers during the January-March quarter, bringing its global subscriber count to 232.5 million. It was also the first quarter since the streamer stopped providing guidance for subscriber numbers, instead focusing on revenue. And management said that it would be forging ahead with its account-sharing crackdown, which rolled out in Canada, New Zealand, Portugal and Spain in February, with the U.S. having its turn beginning in the second quarter.

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Minutes into Wednesday’s trading session, Netflix shares were down 3.7 percent at $321.32.

With much to digest for Wall Street, analysts got a chance to dig deeper into data points supporting their bull or bear arguments, or dissect both. Most experts didn’t come away with their minds, or stock ratings, changed. A couple of them upgraded their stock price target though.

For example, Pivotal Research Group analyst Jeffrey Wlodarczak reiterated his “buy” rating on Netflix, while boosting his stock price target by $25 to $425 in a report entitled “Unique Growth Story.”

“Mainly driven by management commentary around content spend being lower than our relatively conservative expectations, we raised our earnings before interest, taxes, depreciation and amortization and free cash flow forecasts,” which led to the price target increase, Pachter noted. “Netflix represents a frankly unique tech growth story and remains well positioned to generate solid subscriber and revenue/free cash flow growth even given a potential global recessionary environment via their better monetization of the approximate 100-plus million households that currently utilize Netflix outside of the paying household via password sharing.”

Bank of America‘s Jessica Reif Ehrlich reiterated a “buy” rating and a $410 price target, noting: “we believe Netflix is poised to outperform driven by three main catalysts: (1) still significant subscriber runway; (2) ramping of its AVOD offering and (3) upside from password sharing crackdown.”

Guggenheim analyst Michael Morris maintained his “buy” rating and $375 price target on Netflix’s stock following the earnings update in a report whose title could also be read as a reference to the streamer’s series Beef, which has drawn acclaim but also made headlines with a resurfaced controversy involving a co-star: “Beef? Bulls, Bears Collide on Mixed Quarter, Initiative Progress.”

“Guidance for second-quarter revenue, operating income and paid net adds came in below consensus, bolstering the bear case,” Morris explained. “That said, there were multiple bullish indicators as well, led by a more aggressive second-quarter paid sharing rollout following limited membership disruption and quick revenue accretion from the launch in Canada in the first quarter. In addition, the recently launched Basic With Ads tier average revenue per member (ARM) is already ahead of the subscription-only standard plan in the U.S. ($15.49 price point), building confidence in a sustainable contribution to revenue acceleration.” Management’s upward guidance revision for free cash flow “also offset second-quarter guidance concerns,” Morris noted.

Steven Cahall, analyst at Wells Fargo, also stuck to his “overweight” rating on Netflix with a $400 price target. “Paid Sharing Is Caring,” he entitled his report.

“Netflix continues to evolve by driving revenue higher through new channels,” the analyst argued. “This will provide a bigger base to eventually restart content growth, potentially including new genres (e.g. live). There’s a high interest in investment, but margins and cash should ramp nicely, too.“

While paid sharing will create “some second-quarter revenue/net add noise, we see Netflix accelerating to double-digit revenue growth with margin expansion and a nice free cash flow ramp ahead,” he concluded, adding that Netflix was “still attractive to grind higher.”

Cahall also shared his take on Netflix’s new business initiatives, calling himself “bullish” on both the password-sharing crackdown and ad tier outlook. Addressing the firm’s focus on converting free riders to paying users, the expert highlighted: “In Canada, which is the best U.S. proxy, subs and revenue are already back to or above par after the initial churn reaction. We think this bodes well for U.S and Europe to accelerate revenue in the second half (of 2023) and beyond.”

Cahall previously forecast that Netflix’s 2023 and 2024 ad revenue could hit $1.5 billion and $4.3 billion, respectively. And he was encouraged by management’s latest updates, noting: “Netflix says ad tier engagement is running ahead of plan, content is nearly at parity with ad-free and total ad tier average revenue per user (ARPU) is scaling well.”

Evercore ISI analyst Mark Mahaney, who maintained his “outperform” rating and $400 stock price target on Netflix, is similarly optimistic, entitling his report “Night Agent Should Be Here Soon.”

He had upgraded the stock in mid-September, calling the launch of Netflix’s ad tier and pushback against password-sharing “constituted ”major growth curve initiatives – catalysts that could drive a material reacceleration in revenue and earnings per share growth.”

So where does the company stand on that right now? “The first-quarter earnings per share results provided only modest evidence of this,” Mahaney acknowledged, calling the latest figures “mixed,” before highlighting: “Netflix exited 2022 growing 10 percent excluding foreign exchange (impacts), with full-year operating margins of 18 percent and $1.6 billion in full-year free cash flow. We now see Netflix exiting 2023 growing close to 15 percent-plus ex-foreign exchange, with full-year operating margins of close to 20 percent, generating over $3.5 billion in free cash flow and buying back stock.” The Evercore ISI analyst’s takeway: “Fundamentals are clearly and materially improving.”

Echoing Cahall, he also noted “two bullish data points.” First, Mahaney lauded the company for its ad tier having higher average revenue per user than its standard plan, “which means Netflix has ramped up advertising monetization much faster than expected – now the challenge is getting the signups.” Second, “Canada’s paid membership base is now larger than prior to the first-quarter password-sharing (crackdown) rollout in that market and its revenue growth has accelerated,” he noted. That means that the second quarter’s broader password-sharing crackdown “will almost certainly be materially accretive by the third quarter,” the Evercore ISI expert concluded.

TD Cowen analyst John Blackledge also didn’t see any need to change his rating or stock price target, maintaining his “outperform” and $440 target.

The expert mentioned management guidance that second-quarter subscriber net adds would be “roughly similar” to first-quarter levels, “below estimates and reflecting paid sharing timing,” but not surprising for most Street observers. Blackledge also highlighted content strength, writing that first-quarter subscriber growth of 1.75 million “beat our and consensus (estimates) of 1.45 million and 1.38 million due in part to a strong content slate that included returning original titles, such as Outer Banks, You and Murder Mystery 2, as well as new series, such as The Night Agent and Full Swing.”

MoffettNathanson analyst Michael Nathanson did, however, update his target on Netflix shares on Wednesday. He lowered his 2023 estimates for revenue and earnings, but increased his free cash flow forecast. Overall, he maintained his neutral “market perform” rating, but raised his stock price target by $35 to $350, citing the results of his price-to-earnings valuation methodology.

However, Nathanson issued a warning: “The in-line (first) quarter (results) should worry folks about what could happen in the second quarter. To that point, in the second quarter, we now forecast Netflix will add 1.7 million global subscribers, roughly in line with the first-quarter mark, or a 1.1 million (downward) revision from our prior estimate.”

The MoffettNathanson expert highlighted in that context that “the second quarter has always been a dicey quarter with historic bouts of negative sub adds.” Nathanson also underlined the importance of the password-sharing crackdown working out, writing: “The monetization of Netflix’s 100 million global password-sharing households better work, as it underpins the (revenue) reacceleration driving our second-half 2023 estimates.”

Tim Nollen, analyst at Macquarie, similarly has a “neutral” rating with a $350 price target on the streamer. “Netflix is entering a very interesting period where observers are likely to focus on subscriber numbers and the revenue impact of these key moves,” he wrote, warning: “The second quarter could, therefore, be tricky before evidence of success emerges in the third quarter, if all goes well.”

Morgan Stanley analyst Benjamin Swinburne, meanwhile, maintained his “equal weight” rating and $350 stock price target, summarizing investors’ take on Netflix this way in the title of his report: “Delayed & Debated.”

“A one quarter delay in paid sharing leads to lower revenue expectations offset by lower cash content spending,” he wrote. “Paid sharing and the ad tier appear to be delivering at the micro level. But their ability to deliver the robust expectations ahead and support Netflix premium multiple remains unresolved.”

Big Netflix bear Matthew Harrigan, analyst at The Benchmark Company, also continues to have big doubts about the streamer. In a report entitled “Market Still Cutting Netflix Ample Slack for Second-Half 2023 Acceleration,” he maintained his “sell” rating with a $250 stock price target.

“Benefits from getting free-ride Netflix viewers to either sign up for their own accounts or incur incremental charges for associated member accounts are only gradually materializing with some likely third-quarter benefit,” Harrigan wrote. “Benefits and grumbling related to password sharing crackdown will diffuse throughout 2023.”

Netflix’s latest set of results also drew commentary from analysts beyond Wall Street. “Netflix subscriber growth shows that the streaming wars are still on. With 1.7 million subscriber adds, the company is ahead of where it was this time last year but still clearly facing the pressure from all the players in this crowded space,” argued Third Bridge analyst Jamie Lumley.

Commenting on Netflix’s news that its ad tier was generating higher ARPU than its non-ad plan, he shared: “We’ve heard from our experts that each user could be generating up to $5-$6 on top of the subscription, which shows why Netflix is confident in the economics of this offering.” That said, he also shared words of caution. “However, it seems that the ad plan has been slow out of the gates since launching in November,” Lumley said. “With no mention of its old target of 40 million subscribers a year, our experts have highlighted that a target of 10-20 million at most is more realistic.”

PP Foresight analyst Paolo Pescatore also came away with the view that Netflix’s first-quarter earnings report provided “a mixed set of results.”

Argued the expert: “The quarter raises more questions than answers as it pivots toward driving new revenue streams. During this transition there will be ongoing challenges – expect to see spikes in churn, net adds and ARPU with the rollout of new features and services.”

Calling Netflix “a mature business reinforcing less reliance on subscriber growth,” Pescatore said: “It is putting all the building blocks in place for future revenue growth. This is a far longer-term play, so we should not expect to see immediate success.”

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