Netflix (NFLX) is set to report its fiscal third quarter earnings on Wednesday after the market closes. Investors are looking for updates on the company’s crackdown on password sharing, ad-supported offerings, and the potential for more price hikes.
Netflix, which has faced recent Wall Street downgrades, disappointed investors in the second quarter after revenue fell short of estimates and the company’s Q3 forecast came in lighter than expected.
The revenue lag reflects the fact that the company’s advertising tier has yet to fully materialize — threatening its goal of double-digit revenue growth.
“We’re still in the crawl of the crawl-walk-run stage, so it is not easy to build an ad business from scratch. We got a lot of work to do,” Netflix CFO Spencer Neumann said about the ad tier last month.
The company had also reported lower-than-expected ARM, or average revenue per membership; it forecasted that ARM will be flat to slightly down in Q3 compared to the same period in 2022. That’s despite an expected boost of 6 million new subscribers in the third quarter amid the password crackdown.
Here’s what Wall Street expects, according to Bloomberg consensus estimates:
Analysts have preached the long game to investors as many of the company’s initiatives likely won’t impact its bottom line until next year.
“NFLX will be investing in ad tech and content, which will reduce margin expansion but also accelerate revenue,” Wells Fargo analyst Steve Cahall wrote in a note last week.
Cahall lowered his price target on the stock to $460 a share, down from the prior $500, citing the impact of near-term investments. He did maintain his Overweight rating, however, explaining he’s “positive on long-term growth.” Netflix shares, which have fallen about 20% over the past three months, are currently trading around $355.
Margins have been top of mind for investors after CFO Neumann said he anticipates full-year operating margins, which peaked at 21% in Q1, in the range of 18% to 20%. That’s in line with company expectations, although consensus estimates are just below 20% for full year 2023.
Neumann said he expects margins to “tick up again going forward” as growth initiatives begin to take effect, along with other drivers like the company’s foray into gaming and more licensing opportunities.
“We’re seeing more content coming to market, with ‘Suits” success on NFLX marking a paradigm shift that reinforces how much more valuable library can be on the leading platform,” Cahall said. “We think ‘Friends,’ HBO library titles and even Disney content could come to market.”
Although more licensed content will help Netflix beef up its library over the long term, especially amid the double Hollywood strike with actors still firmly on the picket lines, it also could be another threat to margins as content costs balloon.
Earlier this month, the Wall Street Journal reported Netflix — which remains the only profitable streaming service on the market — plans to raise the price of its ad-free streaming tier following the conclusion of the ongoing actors strike. The company declined to comment on the report when asked by Yahoo Finance.
The Journal said the exact timeline for a Netflix price hike — and the amount by which its monthly $15.49 plan would go up — is still unknown. But the rumored increase echoes recent moves by competitors.
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