Shares of streaming giant Netflix (NASDAQ:NFLX) saw a downturn this week, with the stock value falling by 2.2% on Thursday following a 5% decrease on Wednesday. The slump in stock price is attributed by some to remarks made by the company's CFO, Spencer Neumann, at a recent Bank of America (NYSE:BAC) investment conference. Even though Netflix representatives stated that Neumann's comments offered no new information, investors appear to have interpreted his discussion about margins and subscriber growth as a warning for the immediate future.
Neumann pointed out during the conference that while Netflix has been increasing its operating margins by three percentage points each year recently, maintaining this rate of growth might not be sustainable. He suggested that it could potentially limit the company's ability to invest in business expansion and revenue growth.
The CFO also indicated that near-term financial results for Netflix are likely to show more growth in average revenue per member than in overall revenue. This prediction comes as Netflix continues to implement strategies like "paid sharing" to curb password sharing and an advertising-supported subscription tier. Neumann noted that despite the U.S. accounting for the highest level of revenue per member, 90% of Netflix's subscription growth is generated outside the U.S.
Neumann also revealed that Netflix has not increased its prices since early 2022, relying instead on "paid sharing" as the primary strategy to boost revenue growth this year.
In response to these comments, Matthew Harrigan, a Benchmark analyst, retained his Sell rating and $293 target price on Netflix shares. He speculated that the 5% drop in stock price on Wednesday was likely due to Neumann's remarks about striving for a balance between revenue growth and margin improvement.
Furthermore, Pivotal Research analyst Jeffrey Wlodarczak revised his earnings estimates for Netflix's December quarter based on Neumann's statements. Despite maintaining his Buy rating and a Street-high $600 price target, he lowered his target for fourth-quarter average revenue per member growth from 4% to 2%. This led him to cut his fourth-quarter revenue forecast to $8.73 billion, down from $8.89 billion, compared to the Street consensus of $8.85 billion. Wlodarczak also increased his free cash flow forecast for 2023 by $500 million to $6 billion, considering the impact of the Hollywood actors and writers strike.
As of Thursday's close, Netflix shares were trading at $403 while the S&P 500 index was up by 0.8%.
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