Netflix’s Stock Jumps as Earnings Lift Wall Street Mood

Georg Szalai
·14 min read

Netflix’s third-quarter earnings report on Wednesday had much for Wall Street analysts to sink their teeth into – from better-than-expected subscriber additions of nearly 9 million and a lift in its free cash flow forecast for the full year to management commentary on the impact of the streamer’s rollout of its advertising tier and its ongoing password-sharing crackdown, as well as news of price increases.

The news sent the stock soaring in after-hours and in Thursday pre-market trading, helping it gain well more than 10 percent.

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The bounceback came as Wall Street saw the latest performance update from Netflix as a sign that recent investor malaise may have been just as overdone as a previous period of exuberance. The result: more optimism and at least a couple of stock price target boosts, but also some mentions of future questions facing Netflix investors.

Bank of America analyst Jessica Reif Ehrlich reiterated a buy rating and a price target of $525, writing that the “robust” subscriber growth is “indicating the rollout of password sharing is progressing well” and that an additional password sharing crackdown will “drive member growth over the next several quarters which in combination with the announced price increases should buoy growth.”

“A strong quarter – more cards up their sleeves?” was the title that Sanford C. Bernstein analyst Laurent Yoon picked for his generally upbeat post-earnings report. While he maintained his “neutral’-style “market-perform” rating, he raised his stock price target by $15 to $390, citing the “near-term outlook on subscriber growth and content spend capped at $17 billion for 2024.”

“They crushed it,” Yoon added. “The management deserves an Emmy for managing investor expectations, but the results probably surprised them as well.”

Beyond subscriber growth, price hikes “will drive average revenue per member (ARM) growth in U.S./Canada and Europe, the Middle East and Africa starting early next year,” Yoon touted. And he sees consumers generally accepting the higher cost, with the cheaper ad tier also providing an alternative for more price-sensitive subscribers. “We believe Netflix’s utility status makes them well positioned to raise prices, particularly in the U.S./Canada,” the Bernstein analyst argued.

He also discussed the password-sharing crackdown’s success as a positive for investors. Given the big third-quarter subscriber beat, he asked: “Did Netflix pull forward future paid-sharing net adds, or is the addressable market for paid-sharing bigger than anticipated?” Yoon’s take: “We expect it is likely a bit of both given the magnitude of the beat, fourth-quarter guidance and management’s commentary around paid-sharing net adds having ‘several’ quarters to go. This is something that is incremental positive as there’s higher than anticipated subscriber growth.”

MoffettNathanson analyst Michael Nathanson maintained his “neutral” rating on Netflix, but raised his stock price target from $325, to which he had recently cut it from $380, to $390 due to higher earnings estimates amid the subscriber price increases. “In their third-quarter earnings release, Netflix rolled out a series of upside surprises across a variety of 2023 and 2024 metrics that have the net effect of materially lifting 2023 free cash flow and 2024 earnings per share,” the expert wrote. “This will undoubtedly be the read of the market, which will help stabilize Netflix’s recently turbulent stock price.”

Of the new data points, “the biggest surprise is the immediate and substantial price hikes in three of Netflix’s largest revenue markets,” namely the U.S., the U.K. and France, Nathanson argued. “By doing so, Netflix is further incentivizing new and existing members to sign up for its materially lower-priced ad-supported plan while also driving average revenue per member (ARM) among households that are either price elastic and/or advertising adverse.”

How big a financial difference does this make for Netflix? “Using some very simplifying assumptions, we estimate that these pricing changes will lead to a roughly 8-9 percent increase in ARM in these three markets, assuming no major changes to consumer behavior,” the MoffettNathanson analyst said.

Nathanson’s takeaway: “Netflix needs to attract meaningfully more ad-supported subscribers to make their advertising business more than a rounding error. With these price increases, Netflix is intelligently driving adoption of their ad tier while also driving revenues among other cohorts.”

Guggenheim analyst Michael Morris on Thursday maintained his “buy” rating and $460 price target on Netflix shares in a report entitled “Long-Distance Runner.” One of his key takeaways: “Results calmed bear-case fears led by strong membership adds and guide (8.8 million versus around 5.8 million guidance; outlook for similar level in fourth quarter versus consensus 7.6 million), a modest financial beat, and ’24 margin guidance (implied 2-3 percent annual expansion) that addressed downside concerns with margins ‘nowhere near ceiling’.”

He also cited the price increases in major markets as a positive for investors. They “should underpin confidence in 2024 revenue growth acceleration,” while the increased 2023 free cash flow projection, helped by $1 billion from Hollywood strikes-related lower spending, continued stock buybacks and a “relatively modest cash content spend forecast for 2024” of around $17 billion, in line with pre-strike annual spend level, “are supportive of sustained value creation,” the Guggenheim expert explained.

Morris then also noted some open questions. “Management cited strong organic membership growth in addition to a positive impact from paid-sharing initiatives, though details on mix of one-time conversion contribution and percentage of account intervention completion were not provided, and are likely to be lingering concerns,” the analyst argued.

His conclusion: “Post upward relief rally, we expect debate to focus on normalized growth post paid-sharing rollout, which likely limits near-term potential upside. However, we remain positive on the long-term opportunity for the global streaming video leader.”

TD Cowen analyst John Blackledge recently lowered his Netflix stock price target by $15 to $500 due to a reduced longer-term financial outlook for the company while maintaining his “outperform” rating. After the firm’s latest update, he remains comfortable with that stance.

In his earnings review, he highlighted the bigger-than-expected subscriber gain in the third quarter, the streamer’s biggest since the second quarter of 2020, and management’s forecast for similar strength in the current fourth quarter. “The beat was driven by (the) ongoing benefit from paid sharing initiatives coupled with strong underlying business demand thanks to a robust content slate that included returning original titles such as The Witcher, Too Hot to Handle and The Lincoln Lawyer, as well as new shows One Piece, Hack My Home, and Deep Fake Love,” the expert explained.

Mentioning that on the password-sharing crackdown “management noted that ‘cancel reaction’ remains low and is beating their internal expectations, while retention among newly converted subs remains strong,” Blackledge raised his subscriber forecasts. But the TD Cowen analyst left his Netflix rating and stock price target unchanged.

The same was true for Macquarie analyst Tim Nollen who kept his “neutral” rating and $410 stock price target on Netflix in a report whose headline summarized his takeaway this way: “gradual improvements taking shape.”

While subscriber growth outperformed expectations, “average revenue per member (ARM) again declined, however, in line with expectations but still the fourth straight negative quarter,” the expert pointed out. “Management expects this metric to be flattish in the fourth quarter as newly announced price hikes in the U.S., U.K. and France … will roll on gradually, and foreign exchange could have a $200 million negative impact.” That said, Nollen also noted a likely improvement. “It seems ARM should be rising more now – if the ad tier generates at least $15.50 per sub in the U.S./Canada and paid sharing adds $7 per account.”

It is a similar story when it comes to Netflix’s ad push. “The ad tier is still slow to take off,” Nollen mentioned. “30 percent of new sign-ups are ad-supported, but management still spoke of a need to get this higher to attract ad dollars.” The analyst then noted that “more programmatic monetization through Microsoft could help.”

All this added up to Nollen sticking to his “neutral” rating. “We are optimistic on the upside potential to subs, revenue and earnings from paid sharing efforts and its ad tier, but are conscious of the time it will take for these to contribute,” he explained while mentioning Netflix’s fourth-quarter earnings update in January and updates on the impact of the password-sharing crackdown and price increases as possible next catalysts for the streamer.

Meanwhile, Pivotal Research Group analyst Jeffrey Wlodarczak remains one of the biggest Netflix bulls on Wall Street, underlining that in a Thursday report in which he reiterated his “buy” rating with a Wall Street-high price target of $600. He raised his 2023 net subscriber additions forecast to 24.6 million from 21.0 million, but “conservatively left our ’24 net new subscriber forecast essentially unchanged at 18 million, in line with consensus.”

Touting Netflix’s “materially higher than forecast third-quarter subscriber results and fourth-quarter guidance,” he argued that “the company is demonstrating a great start on piracy monetization that we believe can be a subscriber growth engine through most of ’24, even in a potential choppy economic climate.” But that’s not all. “While delivering nicely stronger than expected subscriber growth, the key to the Netflix flywheel, the company is also clearly demonstrating its scale highlighted by continuing expanding operating margins and $6.5 billion in ’23 free cash flow and guidance for continued expanding operating margins in ’24,” the expert noted.

Wlodarczak’s conclusion: “Netflix is clearly dominating the global streaming market that we do not believe is properly reflected in its current market valuation.”

Wells Fargo analyst Steven Cahall also remains a Netflix bull, keeping his “overweight” rating on the stock with his $460 price target, which he had recently slashed by $40. “Much Negative Ado About Nothing” was his takeaway following investor skepticism heading into the earnings report. “Investors/we had taken recent investment commentary to mean a less compelling financial growth algo. The third quarter showed negativity is overdone and growth is better than fine.”

He listed such positives as “big upside to net adds” and “less margin worry,” noting: “While investments are ahead, we walked away from the print thinking Netflix will remain a steadier margin grower.” He expects Netflix’s subscriber price increases to lead to 6 percent-plus average revenue per member growth, excluding foreign-exchange impacts.

His take on Netflix’s stock: “We see upside to valuation if Netflix executes. Estimate raises on a strong outlook (are) likely to quickly get the stock back into the $400s, with ’24 and ’25 being about scaling in ads.”

Evercore ISI analyst Mark Mahaney on Thursday also reiterated his “outperform” rating on shares of Netflix with a stock price target of $500. Latest results “were solidly better than low expectations,” he highlighted in his report entitled “Suits, Slates & Sharing.” “We over-simplistically attribute the strong subs results to Suits and paid sharing, with the slates above referring to a very strong European launch of new titles.” Plus, he highlighted that management’s commentary “suggests the possibility of record-high fourth-quarter sub adds.”

The Evercore ISI expert explained his bullishness this way: “We continue to believe that Netflix’s ad-supported offering and password-sharing initiatives constitute major growth curve initiatives (GCI) – catalysts that will drive a material reacceleration in revenue and earnings per share growth.”

But like some of his peers, Mahaney also outlined issues that investors must think about next. “The two key questions now are: How much of the second-half subs growth is due to paid sharing, aka how tough will the comparison be for fiscal year 2024?” he highlighted. “And when will ARM (average revenue per member) start to rise again?”

His answer to the second question is 2024, as the expert estimates a 6 percent increase. Meanwhile, the password-sharing crackdown is driving “a significant majority” of sub gains in the back-half of 2023, he argued.

“This will create a tough comp for fiscal year 2024,” Mahaney wrote. “Except that paid sharing will likely continue to contribute more paid subs in early 2024, the content slate will very likely be stronger in 2024 than it has been in 2023, and we see the snowballing impact of the ad-supported offering likely driving more subs in 2024 than it has in 2023.”

Wedbush Securities analyst Michael Pachter also remains a big bull, reiterating his “outperform” rating, $525 stock price target and Best Ideas List designation on Netflix shares in a Thursday report with the title “Initiatives Drive Strong Subs Growth.”

“Password crackdown adds subs and expands average revenue per user, while ad tier limits churn,” he summarized two key takeaways from the third-quarter earnings update. “Even while ads are not yet directly accretive – we think they will be accretive by next year, the ad tier should continue to reduce churn and draw new subscribers to the service,” he explained.

“Netflix remains on Wedbush’s Best Ideas List, given our view that the company can generate significantly more free cash flow than its guidance suggests,” Pachter emphasized. “We think Netflix has reached the right formula with its global content to balance costs and generate increasing profitability, while password sharing crackdown and eventually its ad-supported tier should further boost cash generation.” And he argued that Netflix was “well-positioned in this murky environment as streamers are shifting strategy and should be valued as an immensely profitable, slow-growth company.”

Other analysts, who follow the sector but have no stock price ratings and targets, also chimed in on Netflix’s latest quarterly update.

“The company did not disappoint this quarter,” said PP Foresight analyst Paolo Pescatore. “The net subs additions are a testament to its strategy to focus on cracking down on password sharing and plentiful opportunities for further growth over the coming months, as well as the move into advertising. It is firing on all cylinders, with recent efforts all heading in the right direction.”

He also touched on Netflix’s pricing power and potential fallout for streaming peers. “This latest quarter has given the company confidence to increase prices in key and mature markets,” the analyst highlighted. “Significantly this could have a negative impact on rivals as consumers will evaluate all offerings and might look to scale back on streamers they no longer need.”

Importantly, price hikes are key to Netflix’s investment into new fields and future opportunities. “This will help protect its margins with any increase in licensing costs as well moves into new areas, such as retail and live experiences,” the expert explained.

Third Bridge analyst Jamie Lumley, meanwhile, highlighted what pricing changes mean for Netflix’s push into advertising and customer loyalty. “Our experts have highlighted that these price increases will make its ad tier more attractive and aid in the scaling of the ad business,” he wrote. “However, as the velocity of content distribution slows amid the ongoing actors’ strike, customer churn is a risk as viewers wait to see what is new on the platform heading into next year.”

Lumley sees Netflix betting on its content appeal and investment. Its forecast of up to $17 billion in content spending in 2024 “signals the company is hoping to make up ground following a drop in content development this year,” he concluded. “With audiences waiting for follow-up seasons to shows like Stranger Things and One Piece, Netflix is hoping that new content will demonstrate the ongoing value of its now pricier subscription.”

Brian Wieser, principal at Wall Street insights provider Madison and Wall, in a post said that with its price increases Netflix “positions itself to take more consumer spend share from traditional pay TV.” His take on the consumer reaction to higher costs of subscriptions: “Although a 15 percent price increase is significant, I note that it’s likely the case that many – if not most – of Netflix’s subscribers consume enough content to justify this cost given the high volume of time spent with the platform. To the extent that there are concerns regarding subscribers’ capacity to pay for higher-priced services – notwithstanding the lower-priced advertising option that may be preferable for some subscribers – I note that there remains a substantial pool of consumer spending on traditional pay-TV services (around $100 billion annually in the U.S.) driven by consumers spending more than $100 per month that inevitably is making its way from linear pay TV to streaming video. A 15 percent increase in revenue in the United States would probably equate to around $2 billion in annual revenue, for example, or around 2% of spending on pay TV presently.”

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