Netflix Analysts Praise Q2 Earnings, But Are Cautious On Advertising Growth: 'Slower Than NFLX Planned'

Streaming giant Netflix Inc NFLX beat revenue and earnings estimates in the second quarter, but analysts have questions over long-term subscriber growth and slower than expected advertising revenue growth seen in Thursday’s report.

The Netflix Analysts: Macquarie analyst Tim Nollen maintained an Outperform rating on Netflix and raised the price target from $685 to $695.

Needham analyst Laura Martin reiterated a Buy rating and $700 price target.

Rosenblatt analyst Barton Crockett maintained a Neutral rating and raised the price target from $554 to $635.

Macquarie On Netflix: A revenue and earnings per share beat were part of a "good Q2," Nollen said in a new investor note.

The analyst said there is "more work to do" for Netflix going forward.

"The Q3 outlook calls for moderation in subs and ARM; Netflix has to step up its efforts to build out its ad business," Nollen said.

The analyst said fundamentals were solid in the second quarter, with near-term moderation a concern.

"Q3 guidance implies a moderation in growth rates as Netflix cycles against the paid sharing rollout in UCAN."

Needham On Netflix: Strong subscriber growth, higher margins, raised guidance and live events growth were key positives from Netflix's second quarter report, Martin said in a new investor note.

"We are optimistic that NFLX's growing focus on live events can lower its churn rate. NFLX stated that its strategy is to have a monthly cadence of big live events to lower sub disconnects and attract new advertisers," Martin said.

Martin also highlighted increased gaming engagement from Netflix subscribers and the company's goal of having one game launched per month tied to a Netflix property.

One area of concern is Netflix's "anemic ad revenue growth," Martin said.

"We believe advertising rev growth is slower than NFLX planned."

The analyst estimates Netflix is earning $5 per month for each subscriber on the ad-supported plan. Netflix said its goal for the ad-tier is an average revenue per user to be similar to the ad-free tier in the future ($15.50 per month), which would mean hitting $8.50 per subscriber per month in advertising revenue on top of the $7 month subscription fee.

Martin was also surprised by Netflix saying it won't reach "critical mass" for advertising until 2025.

The analyst said an interesting takeaway from the earnings call was that 75% of questions were related to advertising, with only 5% related to subscriber growth.

Martin also cautions that Netflix's change in its guidance could impact the share price.

"NFLX is pivoting its disclosures toward rev growth and away from ARM and sub growth, which we think will add share price volatility to its valuation. Investors care about WHY revs are growing, so they can determine if it's sustainable."

Rosenblatt On Netflix: The streaming company showed upside in net subscriber growth in the second quarter, Crockett said in an investor note.

The analyst praised the second quarter, but has concerns for the third quarter, with guidance suggesting subscriber growth could slow "substantially."

"The question is whether this is a seasonal and/or guidance blip, or the start of an inflection down to a slower, more mature growth profile," Crockett said.

The analyst said Netflix mentioned third-quarter net paid subscriber growth being positive, but less than the 8.8 million adds reported in last year's third quarter.

"It's crucial that sub growth catapult up in 4Q24, a seasonally strong period, to retain positive sentiment on the stock."

Crockett said Netflix will stop reporting subscriber figures in 2025, which makes the fourth-quarter figure important for sentiment.

The analyst said there is a risk that Netflix's subscriber growth levels reset back to levels seen in 2022.

NFLX Price Action: Netflix shares are down 186% to $631.06 Friday afternoon versus a 52-week trading range of $344.73 to $697.49. Netflix stock is up 32% year-to-date in 2024.

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