Why Netflix’s Earnings Weren’t Enough to Restore Investor Confidence

It’s certainly true that the Netflix (ticker: NFLX) June quarter results weren’t as bad as feared, and that has the stock rallying on Wednesday. But neither were the results all that great—the stock is still down 65% for the year and analyst reaction to the quarter was decidedly mixed.

With the risk of another horrendous quarter dodged, Netflix investors now shift their attention to new initiatives in advertising and password sharing—and whether they can drive a return to meaningful subscriber and profit growth.

Let’s review the facts: The all-important subscriber count in the June quarter was down 970,000, the streaming giant’s single worst quarter ever on that measure, but nonetheless better than the company’s forecast for a loss of two million subscribers.

Revenue missed guidance and Street estimates, and so did profit when you adjust for a noncash one-time accounting gain.

Foreign exchange headwinds were a bigger problem than anticipated, and guidance for the September quarter came in below expectations not only for revenue and profit but also for subscribers. Netflix expects one million net adds in the September quarter; consensus had been 1.4 million.

Meanwhile, Netflix in the June quarter lost 1.3 million subscribers in the U.S./Canada region, and another 800,000 in Europe, while Latin America was flat. The losses in more mature markets were offset in part by 1.1 million subscriber adds in Asia, where average subscription prices are lower than in other regions.

Netflix also said that next year it will both launch the previously disclosed ad-supported subscription tier and debut new measures to tamp down password sharing, together potentially setting the stage for better growth down the road.

But there were few new details on either front, and considerable debate remains on how—and when—they will impact the business going forward.

Stifel

analyst Scott Devitt had the most bullish reaction to the Netflix earnings news, upping his rating on the stock to Buy from Hold, with a new target of $250, up from $240.

“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 writes. “Investor focus can now appropriately shift to the viability of Netflix’s growth initiatives …valuation is compelling for a dominant business with considerable optionality ahead.”

But other analysts aren’t so sure.

Morgan Stanley

analyst Benjamin Swinburne inched up his target price to $230, from $220, but keeps his Equal Weight rating.

“At a high level, Netflix’s ambitions are to accelerate revenue growth while moderating its content investment growth,” Swinburne writes. “If successful, shares should outperform. However, it remains early in its monetization initiatives and while success isn’t priced in, neither in our view is failure.”

Evercore ISI analyst Mark Mahaney notes that Netflix posted a “miss and lower” quarter, mostly due to currency.

“This management team has demonstrated both extraordinary industry vision and the ability to pivot successfully,” Mahaney writes in his review of the quarter. “The problem here is that growth has slowed notably (from 30%+ in 2019 to 12%-13% ex-FX in 2022), largely due to maturity and competition, but also due to new market challenges,” including saturation of the North American market.

He notes that subscribers in the U.S. and Canada are on to 73 million, from 75 million at year-end 2021. 

“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 Netflix,” Mahaney adds. “And we don’t think evidence of this success will be apparent until late ’23.”

He says the stock could be a potential long …in 2024. For now he keeps his In-Line rating. 

Needham analyst Laura Martin, who maintains a Hold rating on Netflix shares, remains a skeptic. She contends Netflix is no longer a growth stock, pointing out that revenue growth has slowed for six straight quarters.

She also thinks that the company’s year-end subscriber total at 222 million might actually be a peak. Martin points out that other streaming services have large content libraries, more bundling options and “sister subsidiaries to subsidize higher content spending.” 

Martin also notes that unlike Netflix,

Amazon

and

Apple

have been ratcheting up spending on sports, a factor she sees as potentially luring away some viewers, in particular 30- to 60-year-old men.

“Unless Netflix proves immune to economic theory, it will be the primary source of other streaming services sub growth if only because it is the entrenched incumbent with the most subs,” writes Martin.

Pivotal Research analyst Jeff Wlodarczak, who already had a Sell rating on Netflix shares, chopped his target price to $175, from $235.

Wlodarczak doubts the addition of an advertising tier will boost growth in more mature markets, he fears that average revenue per user could actually drop with the addition of an ad-supported tier, and he thinks the number North American subscribers will continue to fall from here.

Wlodarczak writes that he also remains concerned that Netflix—unlike Apple (AAPL), Amazon (AMZN),

Alphabet

(GOOGL), and

Disney

(DIS)—does not have alternative high-margin businesses to help pay for its streaming business.

He thinks Netflix should be looking for a buyer—and suggests its new ad-partner

Microsoft

as the most logical acquirer.

Netflix shares were up 6.9%, to $215.59.

Write to Eric J. Savitz at eric.savitz@barrons.com

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