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Why Netflix profits weren’t enough to restore investor confidence

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It’s certainly true that Netflix’s (Ticker: NFLX) results for the June quarter weren’t as bad as feared, and that pushed the stock higher on Wednesday. But the results weren’t all that good either – stocks were still down 65% for the year, and analysts’ reaction to the quarter was clearly mixed.

Having avoided the risk of another terrible quarter, Netflix investors are now turning their attention to new advertising and password sharing initiatives and whether they can deliver meaningful subscriber returns and profit growth.

Let’s face the facts: The all-important number of subscribers in the June quarter was down 970,000, which is the streaming giant’s worst quarter by that metric but still better than the company’s forecast of losing two million subscribers.

Revenue fell short of Street’s benchmarks and estimates, as did earnings once non-cash one-time accounting gains are included.

Currency hurdles proved to be a bigger problem than anticipated, with the September quarter forecast coming in below expectations not only in terms of revenue and earnings, but also in terms of subscribers. Netflix expects one million new users in the September quarter; the consensus was 1.4 million.

Meanwhile, Netflix lost 1.3 million subscribers in the US/Canada region and another 800,000 in Europe in the June quarter, while the situation was flat in Latin America. Losses in more mature markets were partially offset by the addition of 1.1 million subscribers in Asia, where average subscription prices are lower than in other regions.

Netflix also said it would launch the previously announced ad-supported subscription tier next year and introduce new measures to reduce password sharing, which together could set the stage for better growth going forward.

But there have been few new details on both fronts, and there is considerable debate about how and when they will impact the business going forward.

stiefel

Analyst Scott DeWitt was most bullish on Netflix’s earnings news, raising his rating on the stock to “buy on hold” with a new target of $250, up from $240.

“With signs of a stabilizing subscriber base emerging, we believe that the prospect of a prolonged period of loss of subscribers is becoming increasingly unlikely,” he writes. “Now investor focus may properly shift to the viability of Netflix’s development initiatives… the valuation is compelling for a dominant business with significant additional opportunities.”

But other analysts are not so sure.

Morgan Stanley

Analyst Benjamin Swinburne raised his price target to $230 from $220 but maintained his “Equal Weight” rating.

“At a high level, Netflix’s ambition is to accelerate revenue growth while curbing growth in content investment,” Swinburne writes. “If successful, the stock should beat expectations. However, he is still in the early stages of his monetization initiatives, and while success is not built into a price, we don’t see it as a failure.”

Evercore ISI analyst Mark Mahaney notes that Netflix reported quarterly losses, mainly due to foreign exchange rates.

“This management team has demonstrated both outstanding industry vision and the ability to successfully change,” Mahaney writes in his review of the quarter. “The problem here is that growth has slowed markedly (from 30%+ in 2019 to 12%-13% excluding exchange rates in 2022), mainly due to maturity and competition, but also due to new market challenges. ”, including market saturation. North American market.

He notes that the number of subscribers in the US and Canada has increased to 73 million, compared to 75 million at the end of 2021.

“We believe the market needs to see the real success of ad-supported and password-sharing initiatives before attributing a sustained premium multiplier to Netflix,” Mahaney adds. “And we don’t think the evidence of that success will become apparent until the end of 23.”

He says the stock could go long in 2024. As long as he maintains his In-Line rating.

Needham analyst Laura Martin, who maintains a Hold rating on Netflix stock, remains skeptical. She argues that Netflix is ​​no longer a growth stock, indicating that revenue growth has slowed for six consecutive quarters.

She also believes the company’s year-end total of 222 million subscribers could be a peak. Martin notes that other streaming services have larger content libraries, more bundling options, and “sister subsidiaries to subsidize higher content costs.”

Martin also notes that, unlike Netflix,

Amazon

as well as

Apple

increased spending on sports, which she believes may distract some viewers, particularly men in their 30s and 60s.

“Unless Netflix proves immune to economic theory, it will be the main source of growth for other streaming services, if only because it has the most subscribers,” writes Martin.

Pivotal Research analyst Jeff Wlodarchak, who already had a Sell rating on Netflix stock, cut his price target to $175 from $235.

Wlodarczak doubts that adding an ad tier will accelerate growth in more mature markets, he worries that average revenue per user may actually drop with the addition of an ad-supported tier, and he believes North American subscriber numbers will continue to fall from now on. .

Wlodarczak writes that he also remains concerned that Netflix – unlike Apple (AAPL), Amazon (AMZN),

Alphabet

(google) and

Disney

(DIS) – has no alternative high-yield businesses to help pay for the streaming business.

He believes that Netflix should be looking for a buyer and proposes a new advertising partner.

Microsoft

as the most logical purchaser.

Shares of Netflix rose 6.9% to $215.59.

Email Eric J. Savitz at eric.savitz@barrons.com

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