Netflix shares slump after CFO's cautionary remarks on growth rate and focus on increasing revenue per member. Analysts respond with mixed ratings and adjusted earnings estimates.
Netflix shares have experienced a three-day slump, with investor concerns fueled by comments made by the company's Chief Financial Officer (CFO) during an investment conference. At the event hosted by Bank of America, Netflix CFO Spencer Neumann took the stage.
During his presentation, Neumann acknowledged that while Netflix had previously expanded operating margins by three percentage points each year, continuing this growth rate would be imprudent. Doing so would hamper the company's ability to invest in its business and drive revenue. Instead, Neumann emphasized that near-term financial results at Netflix were more likely to show increased growth in average revenue per member rather than overall revenue.
To achieve this, Netflix is focusing on initiatives such as "paid sharing," which refers to its efforts to combat password sharing, and the introduction of an advertising-supported subscription tier. Notably, Neumann highlighted that a significant portion of the company's subscription growth—90%—is coming from international markets. However, it is important to note that the United States boasts the highest level of revenue per member.
While Netflix's CFO delivered these cautionary insights, the company's overall strategy remains centered on striking a balance between margin expansion, investment, and revenue growth.
Netflix, the leading streaming platform, has recently stated that it has not raised its prices since early 2022. The company's quarterly results have now surpassed its last price increase. To accelerate revenue growth this year, Netflix is implementing the rollout of paid sharing.
According to Benchmark analyst Matthew Harrigan, a recent 5% decline in Netflix's stock price can be attributed to CEO Neumann's emphasis on the importance of striking a balance between revenue growth and margin improvement. Harrigan has maintained his Sell rating and has set a target price of $293 on the stock.
Pivotal Research analyst Jeffrey Wlodarczak has adjusted his earnings estimates for Netflix's December quarter based on Neumann's comments. Despite the revision, Wlodarczak retains his Buy rating and a target price of $600, the highest on the Street. He now expects a 2% growth in average revenue per member for the fourth quarter, down from an initial estimate of 4%. Consequently, Wlodarczak has revised his fourth-quarter revenue forecast to $8.73 billion from $8.89 billion, whereas the Street consensus stands at $8.85 billion. Additionally, he has updated his free cash flow projection for 2023, increasing it by $500 million to $6 billion due to the anticipated impact of the impending Hollywood actors and writers strike.
In conclusion, Netflix's revenue growth strategy revolves around maintaining stable pricing while introducing new features like paid sharing. Analysts have responded differently to CEO Neumann's statements, with one maintaining a Sell rating and another affirming their Buy rating, albeit with revised earnings estimates. Despite these adjustments, Netflix remains a key player in the streaming industry, poised for continued growth.
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