Proactive Investors - Netflix Inc (NASDAQ:NFLX, ETR:NFC)'s second quarter earnings report has been met positively by analysts at Jefferies and Wedbush, who are bullish on the streaming giant’s long-term potential.
For 1Q, Netflix added significantly more subscribers than expected and topped expectations on the top and bottom lines.
However, its Q3 revenue forecast fell short of estimates spooking some investors with the stock trading 0.5% lower at about $640 in early trade on Friday.
Analysts at Jefferies attributed Netflix’s outperformance in terms of net subscriber additions, adding 8 million versus expectations of 4.6 million, to a strong content slate including Bridgerton Season 3, continued paid sharing benefits, and impressive adoption of its ad tier.
“Netflix saw strength across all regions, but was most noteworthy in APAC, which accelerated its net add growth to 2.8 million, from 2.2 million Q1,” they wrote.
They noted that the company’s revenue guidance, which was short of estimates, was “solid” given increasingly tough second half comparisons from paid sharing.
“We expect some investor concern on the softer implied Q3 subscriber guide, estimating 3.75 million net adds, but note that the about 39 million trailing 12 months net additions in the most since the COVID-19 lockdown period.”
The sequential slowdown in Q3 subscriber growth as a cause for concern, analysts noted.
“It is worth highlighting that the 8 million net adds in Q2 was the strongest Q2 the company has reported except for Q2 of 2020,” they highlighted.
“We expect Q4 sub growth to accelerate to 7.7 million net adds given the content slate (Squid Game Season 2, NFL Games) and better seasonality in Q4 versus Q3.”
However, they noted that Netflix’s ad tier progress has been slower than many had hoped, with the streaming giant stating that ad tier revenue will not be a primary driver of revenue in 2024 or 2025 not a surprise.
“It is still very early days on ad tier monetization as average revenue per user (ARPU) is still below that of a standard plan,” the analysts wrote.
“Partnerships rolling out this summer with the Trade Desk, Google (NASDAQ:GOOGL), and Magnite should help improve advertiser demand, but they are unlikely to drive revenue growth significantly in 2024.”
The analysts repeated their ‘Buy’ rating on the stock and $780 price target.
‘Inevitable’ pivot to slow-growth, high-profit business
Wedbush analysts highlighted that Netflix’s decision to cease reporting its subscriber metrics in 2025 was “consistent with our oft-repeated assertion that Netflix would inevitably pivot from a high-growth, low-profit business to a slow-growth, high-profit business.”
“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,” they wrote.
Netflix is likely to continue benefitting from its password crackdown for years to come as it reduces churn, according to Wedbush.
Analysts are also positive about the company’s positioning of its ad tier revenue contribution into 2025 as it improves advertising solutions and targeting, expands partnerships and adds more live events. With this setup, they see the ad tier becoming a primary growth driver in 2026.
They reiterated their ‘Outperform’ rating and $725 price target on the stock.
“We think Netflix has reached the right formula with global content creation, balancing costs, and increasing profitability,” they wrote.
“With further catalysts ahead, such as complete digestion of the advertising potential of upcoming live events, including NFL games and WWE in 2025 and beyond, and gaming expansion into more licensed IP, we maintain our $725 price target.”