Netflix Faces Margin and Growth Equilibrium Challenges: Analyst

Benchmark analyst Matthew Harrigan reiterated Netflix Inc NFLX with a Sell and a $293 price target.

The streaming giant sold off ~5% Wednesday in reaction to comments from CFO Spencer Neumann at an investor conference noting the company needs to maintain a ‘prudent’ equilibrium between revenue growth and margin improvement – although his statement citing unsustainable 3% vicinity annual operating margin gains appropriately refers broadly to 2017 to 2021 and included ample Covid-19 noise. 

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Following minuscule Benchmark revisions off adjustments for real-time FX movements, the analyst sees operating margin improving by 2.0% this year, 2.1% in 2024, and 1.8% in 2025. 

These estimates are ~75 basis points below the admittedly noisy Street consensus for 2024 and 2025. Neumann also suggested only muted 3Q23 and 4Q23 ARM improvements. 

4Q23 revenue growth may barely scrape above 10% versus some competitor estimates calling for 12-13% momentum or even better – with his estimates dampened by current spot FX estimates implying MA 4Q23 currency headwinds will be an albatross relative to the current quarter. 

Neumann’s comments imply no dramatic step function benefits for 2H23 and even 2024. 

His base case allows for a 415 million+ end-of-forecast global member base versus 238 million presently and an operating margin slightly above 30% versus 2023 guidance for 18% to 20%. 

Neumann indicated yesterday that Netflix is pleased with only light cancellations from its implemented password-sharing policy changes, with a slight split in favor of new vs. shared memberships. 

Netflix is making nascent advertising progress off its well-received upfront market presentation and ad-tech stack collaboration with Microsoft. Given commissions and technology costs, the AVOD contribution margin is lower than for the password-sharing modifications. Netflix remains favorably positioned for scripted programming delivery in the face of the prolonged SAG and WGA strikes off its international production and already produced domestic content. 

Harrigan estimates Q3 revenue of $8.52 billion versus consensus of $7.93 billion.

Price Action: NFLX shares traded lower by 2.14% at $412.24 on the last check Thursday.