Yahoo News Netflix Reaped What It Sowed with Those Earnings Results
Netflix’s second-quarter earnings results on Wednesday were mixed, and so was Wall Street’s reaction to them.
On one hand, in early evidence to paid-sharing’s success, subscriber growth at the streaming leader was great; six million new users signed up from April to June. Another highlight from the positive side of the ledger was Netflix’s earnings per share, which easily surpassed analyst expectations. On the other, revenue was below what analysts were projecting, $8.187 billion vs. the Wall Street consensus of $8.3 billion.
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You win some, you lose some — right? The problem is, as the media analysts at research firm MoffettNathanson astutely pointed out on Thursday, it is Netflix’s executives (and accountants) who have worked so hard recently to retrain us to think of revenue as being more important than subscribers.
The company’s October (Q3 ’22) shareholder letter reads, in part: “We are increasingly focused on revenue as our primary top line metric. This will become particularly important heading into 2023 as we develop new revenue streams like advertising and paid sharing, where membership is just one component of our revenue growth.”
That was a good idea while sub growth stalled, but it is working against the company in this moment, and shares in Netflix have dropped $40 apiece in the past 24 hours; shares of NFLX closed Thursday at $437.42
The streamer’s Q2 ARM, or average revenue per member, declined 1 percent (foreign-exchange neutral; with exchange rates, it was -3 percent) from the comparable quarter last year. That’s particularly problematic because Netflix’s prior guidance was that its ARM would grow — albeit slightly.
Netflix says the revenue-per-user decline “was driven by a combination of limited price increases over the past 12 months (leading up to the launch of paid sharing), timing of paid net additions (primarily late in the quarter due to the May 23 rollout of paid sharing in Q2), and a higher mix of membership growth from lower ARM countries.”
It’s not a one-quarter issue; Netflix forewarned it now expects average revenue per member to “be flat to slightly down” for Q3.
For Barton Crockett of agency broker/investment bank Rosenblatt Securities, that’s an issue. Two of his six “Key points” from this morning’s earnings recap were dedicated to the disappointment; he titled the sections “Flabby ARM” and “ARM-Twisting.” Those are not complimentary.
That said, Crockett pushed his old target price ($358) for Netflix’s stock up to $400 per share, but believes everyone needs to temper enthusiasm a bit. “Netflix is a solid company, executing well,” he wrote, “but expectations need to appropriately reflect the onset of maturity and expectations need to be kept within bounds.”
Also in the below-market camp is Tim Nollen of financial services company Macquarie, who maintained his prior $410 price target. Nollen was surprised that ARM was down when 1.2 million of Netflix’s 5.9 million new subscribers came from the U.S. and Canada, where a membership costs real money.
Michael Nathanson and his team are probably the hardest on Netflix; MoffettNathanson maintained its previous price target of $380 per share. Mother…
Nathanson is “concerned” over Netflix’s own guidance (revenue: $8.52 billion/operating income: $1.92 billion/net income: $1.58 billion) for the ongoing summer quarter. But he also believes there’s simply not enough information being shared by Netflix about the results of its recent efforts.
“Without company disclosure around the number of ‘Extra Members’ being added to accounts as part of the password sharing crackdown, the number of users that crackdown has even targeted so far, or any insight into the number of subscribers on the ‘Standard with Ads’ tier, the drivers underpinning Netflix’s revenue growth are more unclear than ever,” Nathanson wrote.
The equity analysts at bank Wells Fargo, who maintained their prior $500 price target, explained the share slippage away as the result of investors being “over-exuberant” about the streamer’s password-sharing crackdown. And given the fact that NFLX has been crushing the S&P 500 year-to-date (at market close yesterday, before earnings were shared, the disparity was +62 percent vs. +19 percent), Steven Cahall and his group there think many investors “felt they missed the rally.” No one wants to buy high.
Other analysts though have significantly raised their target prices and are encouraged by the results, particularly the earliest paid-sharing upshot.
Mark Mahaney and Vijay Jayant of investment-banking firm Evercore ISI outright said they “would encourage investors to buy NFLX shares,” which is not something you often see written that bluntly in investor notes. The duo soared its NFLX price target from $400 to $550, writing off the post-earnings stock decline as “an expectations correction — not a fundamentals correction.” Give paid-sharing time, they argued.
Alicia Reese and Michael Pachter of private banker Wedbush Securities sure will. They raised their NFLX price target from $475 to $525, and the stock remains firmly on their “Best Ideas List.” Those two are all about the Benjamins, and believe Netflix can generate more free cash flow “than its guidance suggests.” Plus, like others have said, paid sharing and advertising has “only begun” to pay off.
During Wednesday’s subsequent earnings interview, Netflix Co-CEO Ted Sarandos addressed the actors and writers strikes that are looming over all of Hollywood, saying he comes from a union family and is “super committed” to seeing the strikes resolved soon. Analysts believe the strikes could in some ways be a boon for Netflix — if they go on long enough.
“Like COVID, in a prolonged Hollywood strike [Netflix] likely gains share of engagement,” Wells Fargo wrote in its note to clients (which, like all of the ones cited in this story, was obtained by IndieWire). It’ll also gain share in advertising, and — throwing in paid sharing — global streaming revenues. “We’re happy to be patient on a share gainer,” Cahall wrote.
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