Netflix’s second-quarter earnings results on Wednesday were mixed, as was the reaction from Wall Street.
On the one hand, in the early trials of paid sharing’s success, subscriber growth at the streaming leader was tremendous; six million new users signed up from April to June. Another highlight on the bright side of the ledger was Netflix’s earnings per share, which easily exceeded analyst expectations. On the other hand, revenue was lower than analysts expected, at $8.187 billion against Wall Street’s consensus of $8.3 billion.
You win some, you lose some, right? The problem is, as media analysts at research firm MoffettNathanson astutely pointed out Thursday, it’s Netflix executives (and accountants) who have worked so hard recently to retrain us to think of revenue as more important than subscribers.
The company’s October (Q3 ’22) letter to shareholders reads, in part: “We are increasingly focused on revenues as our primary benchmark. This will become especially important in 2023 as we develop new revenue streams such as paid advertising and sharing, where membership is only one component of our revenue growth.”
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It was a good idea as secondary growth stalled, but right now it’s working against the company, and Netflix’s shares are down $40 each in the last 24 hours; shares of NFLX closed Thursday at $437.42
The streamer’s second-quarter ARM, or average revenue per member, was down 1% (neutral to FX; with FX, was -3%) from the comparable quarter last year. This is especially problematic because Netflix’s previous guidance was that its ARM would grow – albeit slightly.
Netflix says the decline in revenue per user “was driven by a combination of limited price increases over the past 12 months (leading to the launch of paid sharing), timing of paid net additions (mostly at the end of the quarter due to the May 23 launch of paid sharing in Q2), and a higher mix of subscription growth from lower ARM countries.”
It’s not a quarter problem; Netflix has warned it now expects average revenue per member “to be flat or down slightly” for the third quarter.
For Barton Crockett of brokerage agency/investment bank Rosenblatt Securities, that’s a problem. Two of his six “Key Points” earnings summary this morning were dedicated to disappointment; he titled the sections “Flabby ARM” and “ARM-Twisting”. Those are not free.
That said, Crockett has pushed his old target price ($358) for Netflix stock up to $400 a share, but believes everyone needs to tone down some enthusiasm. “Netflix is a solid company, running well,” he wrote, “but expectations need to adequately reflect the onset of maturity, and expectations need to be kept within bounds.”
Also at the lower end of the market is Tim Nollen of financial services firm Macquarie, which stuck to its previous price target of $410. Nollen was surprised that ARM was down when 1.2 million of Netflix’s 5.9 million new subscribers came from the US and Canada, where a subscription costs real money.
Michael Nathanson and his team are probably the toughest on Netflix; MoffettNathanson maintained his previous price target of $380 per share. Mother…
Nathanson is “concerned” about Netflix’s (revenue: $8.52B/operating income: $1.92B/net income: $1.58B) guidance for the current summer quarter. But he also believes there simply isn’t enough information shared by Netflix about the results of his recent efforts.
“Without company disclosure of the number of ‘Extra Members’ added to accounts as part of the crackdown on password sharing, the number of users the crackdown has targeted thus far, or any information about the number of subscribers at the ‘Standard with Ads’ tier, the drivers behind Netflix’s revenue growth are more unclear than ever,” Nathanson wrote.
Stock analysts at bank Wells Fargo, which stood by their previous price target of $500, explained the stock slide as a result of investors being “too exuberant” about the streamer’s password-sharing crackdown. And given that NFLX has crushed the S&P 500 since the beginning of the year (as of yesterday’s market close, before earnings share, the disparity was +62% versus +19%), Steven Cahall and his team think many investors “felt they missed the rally.” Nobody wants to buy high.
Other analysts, however, have raised their price targets significantly and are encouraged by the results, especially the first pay-sharing result.
Mark Mahaney and Vijay Jayant of investment banking firm Evercore ISI have openly said they would “encourage investors to buy NFLX stock,” which isn’t something you often see written so bluntly in investor notes. The duo raised their NFLX price target from $400 to $550, writing off the stock’s post-earnings drop as “a correction in expectations, not a correction in fundamentals.” Allow time for paid sharing, they argued.
Alicia Reese and Michael Pachter of private banker Wedbush Securities certainly will. They’ve 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 could generate more free cash flow “than its guidance suggests.” Also, as others have mentioned, paid sharing and advertising have “only begun” to pay off.
During his subsequent earnings interview on Wednesday, Netflix co-CEO Ted Sarandos addressed the actor and writer strikes looming all over Hollywood, saying he comes from a union family and is “super busy” seeing the strikes resolved soon. Analysts believe the strikes could in some ways be a boon for Netflix, if they last long enough.
“Like COVID, in a sustained strike Hollywood (Netflix) probably earns engagement shares,” Wells Fargo wrote in its note to clients (which, like all those referenced in this story, was obtained by IndieWire). It will also earn advertising shares and, through paid sharing, global streaming revenue. “We’re happy to be patient on a stock gain,” Cahall wrote.
