Netflix shares jumped on Wednesday after the streaming giant surprised Wall Street on Jan. 23 by reporting its second-best quarterly subscriber additions ever (13 million) and unveiling a 10-year, $5 billion deal for WWE flagship show Raw, as well as the sports entertainment powerhouse’s content internationally.
The latter allowed the company to make a big splash in the live events content space that it has been targeting. “Expanding into live event programming is something we’ve talked about for quite a while, and this has been in the works, so we used to look at this as fits inside of our $17 billion programming spend now,” said co-CEO Ted Sarandos on its earnings call.
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And the streaming giant’s fourth-quarter earnings report showed it ending 2023 with 260 million subscribers worldwide, helped by such original programming as Squid Game: The Challenge, new seasons of Lupin and Sex Education, the Money Heist spin-off Berlin, the conclusion of The Crown, awards season contenders, such as Bradley Cooper’s Maestro and Todd Haynes’ May December, Aardman Animation’s Chicken Run: Dawn of the Nugget, the animated Leo, and Zack Snyder’s Rebel Moon – Part One: A Child of Fire.
The subscriber jump came in well ahead of most Wall Street experts’ expectations and seemingly confirming some analysts’ crowning of Netflix as the “king” of streaming.
The company’s quarterly earnings update highlighted three opportunities ahead: “improving the core (series and film), while broadening our offering (games, live and sports-adjacent programming)”; bringing its advertising business to scale; and deepening “our connection with fans through our marketing, consumer products and innovative new live experiences.”
So Wall Street analysts had a lot to digest and analyze overnight, with most experts coming away with bullish takes on the company led by co-CEOs Sarandos and Greg Peters, along with executive chairman Reed Hastings.
Netflix’s stock was up more than 10 percent in Wednesday pre-market trading as of 8:45 a.m. ET at $544.50, up 10.6 percent. Many analysts felt the need to play catch-up, increasing their stock price targets.
One of them was Macquarie analyst Tim Nollen who also upgraded Netflix shares from “neutral” to “outperform” in a Wednesday report entitled “What’s Not to Like?,” while pushing his stock price target up by $185, from $410 to $595. “Netflix delivered excellent fourth-quarter results and outlook as its efforts to boost subs, revenue and earnings are bearing fruit,” he explained. “Netflix is expanding into the live events business in a big way with the signing of WWE Raw, which can grow its audience and advertising.”
Nollen’s conclusion: “We had been waiting for confirmation that Netflix’s moves were paying off. We have that now, and upgrade to ‘outperform’.”
Wells Fargo analyst Steven Cahall also lauded the latest Netflix updates. In his post-earnings report entitled “Still a Growth Stock,” he reiterated his “overweight” rating on Netflix shares and boosted his stock price target by $190, from $460 to $650. “We thought Netflix might tread water in the first half of 2024 with operating income margins set, paid sharing dwindling and ads scaling,” he explained his call. “Fourth-quarter outperformance indicates there’s a lot of growth/margin still ahead.”
The expert also dissected the WWE deal and management’s commentary that Netflix’s ad tier has become large enough for the company to start retiring its cheapest ad-free option, its basic plan, later this year.
It is “still early innings” for the streamer’s ad business, Cahall argued. “We think ad scale is Netflix’s number 1 priority (excluding its north star of member satisfaction). Price increases, bundles and eliminating the basic without ads tier are key drivers.” Netflix’s ad subs would hit 42 million in 2024 and 75 million in 2025, with ad revenue reaching $1.5 billion and $3.7 billion, respectively, “with ads likely not a stock catalyst until ’25-plus,” Cahall estimated.
“We think the WWE deal accelerates ads, but is not Netflix signaling a pivot toward pricey sports rights,” he concluded, calling it a “play for ad tonnage.”
Pivotal Research Group analyst Jeff Wlodarczak is even more bullish in terms of Netflix’s stock upside. In his report, entitled “This Is What Winning Looks Like,” he reiterated his “buy” rating and boosted his stock price target by $100 to what he described as a Wall Street-high $700. “Netflix has already won the streaming wars, and this type of strong result/guidance, especially relative to its streaming peers, is what winning looks like,” he emphasized.
“It is abundantly clear that Netflix is demonstrating massive scale as it continues to produce strong subscriber and free cash flow growth with the ability to invest to accelerate that growth (through deals such as the announced ’25 WWE agreement) while its streaming peers continue to generate substantial losses,” Wlodarczak explained. “Interestingly, those peers have resorted to selling their formally streaming exclusive library content to Netflix,” he weighed in on one of the big trends of 2023.
Wlodarczak’s takeaway: “While not necessarily needed by Netflix, we believe other streaming players/media players will have no choice but to continue to sell their premium library content to Netflix to offset their own poor returns in streaming, which paradoxically enhances the value of Netflix service allowing them to drive higher subscriber growth, reduce churn and increase average revenue per user.”
TD Cowen analyst John Blackledge maintained his “outperform” rating on Netflix, but also increased his stock price target, in his case by $35 to $600. In his report’s headline, he summarized his takeaway from a busy Tuesday for Netflix with a wrestling reference: “Off the Top Rope, Netflix Delivers a Huge Net Add Beat, Margins Better.”
His take on the ad business outlook is also bullish. “AVOD tier growth has been bolstered by improvements to the offering including the addition of downloads and better content parity with the standard offering,” the analyst wrote. “Netflix mentioned that they plan on fully retiring the lower-cost basic tier in the U.K. and Canada in the second quarter, which should result in further momentum for the ad tier.”
Guggenheim Securities analyst Michael Morris also expressed positive surprise about the various news updates from Netflix, sticking to his “buy” rating and raising his stock price target by $100 to $600.
“Surprisingly strong fourth-quarter member additions and bullish 2024 commentary re-ignited acceleration expectations as Netflix beat our/consensus estimates for member additions, revenue, and operating income,” he explained in his report, “The Show Goes on!” Morris also highlighted upward revisions to his financial and subscriber outlook and emphasized “our confidence in longer-term value creation.”
Joining Morris in the $600 price target club is Evercore ISI analyst Mark Mahaney, who reiterated his “outperform” rating on Netflix and boosted his price target by $100 “in the wake of fourth-quarter earnings results that were materially better than high expectations.”
“Clearly Ready to Rumble!” was his bullish headline with a WWE reference. “The biggest takeaway from the quarter for us is our increased confidence that Netflix’s SAVOD (subscription- and ad-supported video on demand) offering and paid sharing initiatives are incremental and sustainable.”
Mahaney touted the ad tier strategy. “By introducing last year an ad-supported plan that was 30 percent cheaper than its core offering, Netflix materially increased its total addressable market. This is becoming clearer and clearer over the quarters and in our surveys,” the expert emphasized. “And not only does the ad-supported offering boost gross adds, it also reduces (subscriber) churn. And it indirectly boosts the company’s pricing power.”
BMO Capital Markets analyst Brian Pitz, who has an “outperform” rating on Netflix, raised his stock price target from $566 to $638 on Wednesday. Among the factors making him bullish, he mentioned “$17 billion of content investments positioning Netflix for wallet share gains in 2024 and beyond” and the firm’s “post-strike U.S. growth trajectory driven by intriguing slate and durable growth levers.”
Indeed, Pitz argued that the biggest investor debate these days is “whether the company has matured in the U.S.” His answer to this question: “We continue to believe Netflix has ongoing levers to durably grow and scale subscribers in the U.S., including ‘sports entertainment’ scripted programming (WWE in 2025), switch for T-Mobile users to a standard with ads plan beginning January 2024, growth in games (engagement up threefold year-over-year), and opportunities around animation (Leo/Sea Beast for example).”
He also touted Netflix’s “ongoing total addressable market growth” thanks to its ad-supported tier.
William Blair analyst Ralph Schackart liked what he saw in terms of Netflix’s development of its ad tier in the latest quarter, which Wall Street expects to become a bigger business driver in 2025. “Ad-Supported Membership Base Continues to Scale,” he shared his takeaway in his post-earnings report, in which he stuck to his “outperform” rating. While he has no price target on the stock, he predicted “upside of about 15-20 percent over the next 12 months.”
Highlighting the positive business impact of the password-sharing crackdown, Schackart also shared his take on the ad tier. “While we believe the ad-supported platform is still in need of additional refinement, we remain optimistic that both this newer tier and paid sharing will provide tailwinds to (revenue) through the medium term,” he argued.
The expert also likes the WWE deal. “This strategic partnership will also likely strengthen Netflix’s expanding advertising business, as the live broadcasts will provide additional advertising opportunities,” he explained. “Overall, Netflix continues to be well-positioned to remain a secular streaming winner,” Schackart concluded.
In his report, entitled “Delivering a strong sequel,” Bernstein analyst Laurent Yoon joined the Wall Street parade of stock price target increases, but not that of wrestling wordsmithery and all-around bullishness. All in all, he stuck to his “market-perform” rating on Netflix shares, while lifting his stock price target by $100 to $490.
“We’ll stay away from the wrestling puns,” he wrote. “Netflix once again put up an impressive performance this time against more elevated expectations. In a quarter where we expect fundamentals to set conviction, Netflix delivered beats across the board, led by paid membership net adds.” But he also highlighted: “2024 signals a return to ‘normal’ operations as paid sharing winds down and price hikes roll through. Can the company build on recent momentum? We’re constructive, but not entirely sure.”
With the advertising business likely becoming a “material” contributor only in 2025, Yoon argued: “It’s always great for free cash flow to add the subs earlier than later, but the pesky question of ‘what happens when paid sharing efforts wind down?’ remains top of mind as the company confirmed that execution here is now being tucked into business as usual.”
Morningstar analyst Matthew Dolgin also had a mixed review. “We see further tailwinds to average revenue per member over the next few years but believe subscriber growth will slow,” he warned. “We’re raising our fair value estimate to $425 from $410 after incorporating the results and management’s 2024 outlook, but we believe the stock has gotten ahead of itself even as we expect Netflix to remain dominant.”
MoffettNathanson analyst Michael Nathanson also continues to have doubts that it will all be clear-sailing for Netflix ahead. He raised his stock price target by $35 to $475, while sticking to his “neutral” rating. “We are concerned that the current subscriber growth in the U.S./Canada and Western European markets represent a pull-forward driven by ‘interventions’ of the most highly engaged password sharers,
which could create a subscriber headwind pocket in the middle of this year,” he explained one of his concerns. “That pull-forward, as well as a potential churn spike from increased pricing on the high end of Netflix’s rate card, could come together to spook the market and re-set Netflix’s multiple yet again.”
Even beyond Wall Street, experts weighed in on Netflix’s latest results and its big WWE deal.
Third Bridge analyst Jamie Lumley explained the importance of the addition of wrestling programming this way: “The rights deal with the WWE demonstrates how Netflix is continuing to evolve and diversify its content strategy. This is the company’s largest move into live programming yet and will bring a large volume of content to the platform each year.”
But he argued that observers are still waiting to hear more on another one of the streamer’s initiatives. “A big question yet to be answered is how committed Netflix is to building out its gaming offering,” he said. “We’ve been hearing that the company prefers to incrementally build this business instead of pursuing a major acquisition, but it remains to be seen whether this approach will change as Netflix looks to further improve subscriber engagement.”
PP Foresight analyst Paolo Pescatore, meanwhile, saw more evidence of Netflix’s dominance in streaming. “Another cracking quarter for Netflix to finish the year strongly, almost a return back to the pre-pandemic world,” he wrote. “These latest results reaffirm that Netflix is definitely the king among all streamers.”
The next big focus for Netflix is the challenge of building its ad tier to significant scale. “2024 promises to be a pivotal year for its ads business as it starts to ramp up efforts,” the expect said. Like many of his peers and management, he sees it as “still early days” for the ad business.
Pescatore also expects price hikes from Netflix ahead. “Overall, it is firing on all cylinders with recent efforts all heading in the right direction,” he concluded, arguing the company “firmly got its mojo back.” Added the analyst: “New broader appeal programming, a clampdown on password sharing, and a price rise all bode well for it as it embarks on another year heavily focused on revenue growth.”
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