8 Netflix Analysts React To Q2 Earnings Beat, Subscriber Guidance, Ad-Supported Tier

Netflix, Inc. NFLX shares gained 7.1% on Wednesday after the company reported better-than-expected subscriber losses in the second quarter and detailed plans to launch a new, low-cost, ad-supported subscription tier.

On Tuesday, Netflix reported second-quarter adjusted EPS of $3.20, exceeding analyst estimates of $2.94. Second-quarter revenue was $7.97 billion, missing analyst estimates of $8.035 billion. Revenue was up 8.6% from a year ago.

Netflix reported a loss of just 970,000 global paid net subscribers in the second quarter, less than half of the 2 million subscribers analysts were expecting the platform to lose. Looking ahead, Netflix said it expected to add 1 million net new subscribers in the third quarter.

Netflix also said it plans to unveil a new lower-cost, ad-supported subscription tier in early 2023.

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Netflix Offers GARP: BMO Capital Markets analyst Daniel Salmon said Netflix's growth at a reasonable price (GARP) thesis is fully intact.

"First and foremost, both 2Q actual and 3Q guidance for subs/members were good enough, and the FCF outlook had more color added: from consistently FCF positive to +$1 billion in 2022 and substantial growth in 2023," Salmon wrote.

Wells Fargo analyst Steven Cahall said Netflix reassured investors that they shouldn't be concerned about recent sub losses or the company's new business strategies.

"Now those initiatives are starting to take shape, and while it's too early to visualize the company's longer-term financial complexion, which keeps us happier on the sidelines, we think the recent pain is over," Cahall wrote.

Morgan Stanley analyst Benjamin Swinburne said Netflix has a lot to prove when it comes to its strategy of accelerating revenue growth while moderating content investment growth.

"It remains early in its monetization initiatives, and while success is not priced in, neither in our view is failure," Swinburne wrote.

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Uninspiring Guidance: Raymond James analyst Andrew Marok said Netflix's narrower subscriber loss in the second quarter was a positive, but its third-quarter subscriber growth number remains soft as it continues to battle foreign exchange headwinds.

"Content was a key driver of the less-bad 2Q sub loss, with 'Stranger Things' launching to record engagement figures, though churn remained somewhat elevated in UCAN following the recent price increase (we believe competition continues to play a role)," Marok wrote.

Rosenblatt Securities analyst Barton Crockett said the second quarter report was a relief for Netflix investors, but it wasn't exactly inspiring.

"The strategic pivot to an ad tier and to stamp out password sharing is not ramping up until 2023," Crockett wrote.

No Near-Term Catalysts: Needham analyst Laura Martin said another quarter of subscriber growth losses underscores that Netflix is no longer a growth stock.

"By implication, its valuation metrics need to recalibrate to EV/EBITDA or a P/E, which implies further multiple compression since it remains expensive on these metrics," Martin wrote.

KeyBanc analyst Justin Patterson said Netflix's content launches were heavily skewed toward the first half of 2022, and it still faces intense forex headwinds.

"Given these dynamics, it is hard for us to envision Netflix returning to low-to-mid-teens revenue growth or 20%+ reported operating margin over the near term," Patterson said.

Bank of America analyst Nat Schindler said Netflix's quarter was better than feared, but still not great.

"We remain skeptical on the near to medium term net benefits of either Netflix’s upcoming ad-tier or its solution to password sharing and will await further information as these initiatives come closer to launch some time in 2023," Schindler wrote.

Ratings And Price Targets:

• BMO Capital Markets has an Outperform rating and a $365 target.
• Wells Fargo has an Equal Weight rating and a $300 target.
• Morgan Stanley has an Equal Weight rating and a $230 target.
• Raymond James has a Market Perform rating.
• Rosenblatt Securities has a Neutral rating and a $201 target.
• Needham has a Hold rating.
• KeyBanc has a Sector Weight rating.
• Bank of America has an Underperform rating and a $196 target.