Netflix (NFLX) shares surged double digits on Wednesday, climbing as much as 14%, after the streaming giant reported strong fourth quarter earnings with subscribers topping 13 million.
Revenue beat consensus estimates of $8.71 billion to hit $8.83 billion in the quarter, an increase of 12.5% compared to the same period last year, as the streamer leaned on revenue initiatives like its crackdown on password sharing and ad-supported tier, in addition to the recent price hikes on certain subscription plans.
The company guided to first quarter earnings per share (EPS) of $4.49, ahead of consensus calls for $4.09.
Wall Street overwhelmingly applauded the report with analysts upping their price targets across the board.
“By all counts, Netflix is riding high,” MoffettNathanson analyst Michael Nathanson, who upped his price target by $35 to $475, wrote in a new note. “The success of their password sharing crackdown, the rollout of a low-priced ad tier and continued growth in lower priced developing markets have rendered the trauma of 2022 a distant memory.”
Still, some warned of an overblown valuation while others have advised their clients to sit on the sidelines, at least for now.
Subscriber slowdown expected with valuation in focus
Netflix’s double-digit subscriber gains may not be sustainable as the streamer slowly completes its password-sharing crackdown, according to some analysts.
“While we project subscriber growth will remain relatively high, we think the catalysts that led to outsize growth last year will significantly subside in 2024,” Morningstar analyst Matthew Dolgin wrote in a note on Wednesday. “But our sober look at the level of net member additions shouldn’t obscure how impressive Netflix’s performance has been.”
Despite that strong performance, however, the analyst, who upped his price target to $425 from $410, warned “the stock has gotten ahead of itself even as we expect Netflix to remain dominant.”
MoffettNathanson had a similar view point: “We are concerned that the current subscriber growth in US/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.”
In other words, the juice from the password crackdown has been all but squeezed.
“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,” analyst Michael Nathanson said. He maintained his Neutral rating on the stock as a result.
Deutsche Bank also cautioned against the streamer’s valuation, downgrading its rating to Hold from Buy.
“Netflix is still the best story in media among the vertically integrated producers/programmers/distributors,” lead analyst Bryan Kraft wrote. “However, we think that Netflix’s leadership position is fully priced into the stock at these levels.”
Kraft, who raised his price target to $525 from $460, added, “We see this as leaving little room for multiple expansion given what we think will be peak EPS growth in 2024.”
Bullish on WWE
Netflix’s newly announced WWE deal served as a major talking point on the earnings call, with analysts describing the deal as a “logical next step” in the streamer’s growth story.
“It adds to NFLX’s ability to continue to look for growth beyond paid sharing as new content = more ads and/or more subs,” Wells Fargo analyst Steve Cahall said following the news. “We think NFLX’s #1 focus is driving scale in ads as it needs reach and frequency to carve out a seat at the top table with US ad buyers.”
Cahall maintained his Overweight rating and upped his price target to $650 from $460.
“WWE Raw changes the game,” added Macquarie analyst Tim Nollen. The 10-year deal “can bring a large and engaged year-round audience and can jump-start Netflix’s ad sales effort with large-event live content.”
Nollen upgraded the stock to Outperform from Neutral, saying the company has “turned a corner” following incremental ad tier growth and expected 2024 increases to average revenue per member, or ARM. He raised his price target to $595 from $410.
Still, management said the WWE deal doesn’t change its outlook on avoiding traditional live sports investments, at least for now.
“WWE Raw is sports entertainment, which is right in the sweet spot of our sports business, which is the drama of sports,” Netflix co-CEO Ted Sarandos said on the earnings call, making a reference to its forays in sports like football, F1, tennis, golf, cycling, and more via documentary — notably not live sports.
Bank of America analyst Jessica Reif Ehrlich, who reiterated her Buy raising and raised her price target to $650 from $585, wrote she “appreciate[d] the strategic rationale for Netflix expanding into ‘sports-adjacent’ programming given their burgeoning ad-business and prior strength in the sports entertainment segment.”
It’s all about the ads
Netflix said ad-tier memberships increased by nearly 70% quarter over quarter with the ads plan now accounting for 40% of all Netflix sign-ups in the markets it’s offered in.
“Advertising remains an opportunity for monetization,” wrote Deutsche Bank’s Kraft. “But it’s still early days and 2024 will be more about growing the ads tier base and building out the international sales effort than scaling ad revenue in a meaningful way.”
Earlier this month, Netflix said the ad tier has surpassed 23 million monthly active users, up 8 million from its November update.
To note, monthly active users, otherwise known as MAUs, are not the same as paying subscribers. The company has yet to reveal actual subscriber figures for the ad tier or how much revenue it’s generated so far. MAUs can include multiple people using the same account.
Macquarie’s Nollen credited the streamer’s plan to eliminate its Basic, ad-free tier this year, explaining the move will help the streamer better scale its ads business.
“We think Netflix with the right strategy can get to scale and certainly has the data and engagement levels to build a powerful ads business,” he said. “This is what we see as key to the stock moving higher as the business settles into a cadence of price hikes and more modest subscriber gains after the password sharing juices out.”
Wells Fargo’s Cahall agreed, saying there’s still major runway ahead for the streaming giant in 2024 and beyond: “Netflix is still a growth stock.”
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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