Netflix Analyst Re-Rates Stock Ahead of Q3 Earnings Citing Margin Concerns and Leadership Changes

Piper Sandler analyst Matt Farrell maintained Netflix Inc NFLX with a Neutral and lowered the price target from $440 to $400.

Heading into the earnings announcement, he views dynamics as a mixed bag. 

Management talked down margins for next year at an investor conference in mid-September, while the leader of the advertising business is stepping away after just one year on the job. 

In addition, reports of a price increase on the ad-free plans could help support revenue acceleration. 

Farrell suspects the paid-sharing roll-out will continue to be a tailwind for subscribers in the near term. 

Over the last week, media reports noted Netflix could be raising prices on its ad-free plans once the Hollywood strikes were resolved. He did not expect price increases until next year as management waited for the paid-sharing roll-out to play its course. 

At an investor conference in mid-September, management talked down margin expansion in 2024, noting that it isn't necessary to drive ~300 bps of margin expansion per year now that Netflix has around 20% margins.

As a result, he recommends investors remain on the sidelines into the print before he has more clarity on the story into next year. In addition, Farrell also lowered his 2024 and beyond cost profile to reflect the company's updated commentary.

With the departure of Jeremi Gorman, Farrell had a hard time thinking the ad business would take the step from crawl to walk/run any time soon. The issue continues adopting the ad tier, with management hoping the paid-sharing roll-out drives uptake. The analyst doubts if existing ad-free users switch after not having ads. 

Farrell projects Q3 revenue of $8.54 billion and EPS of $3.49, in line with the consensus.

Morgan Stanley analyst Benjamin Swinburne maintained Netflix with an Equal-Weight and lowered the price target from $450 to $430.

Price Action: NFLX shares traded lower by 1.83% at $366.49 on the last check Wednesday.