Is Netflix Losing Its Spark? Analyst Downgrades Amid Sluggish Growth and AVOD Adoption

Wolfe Research analyst Peter Supino downgraded Netflix Inc NFLX from Outperform to Peer Perform.

While Netflix should continue to gain a share of the global premium video revenue pie, pay TV accounts for >50% of viewership today, and while Netflix is on course to build a massive advertising business for the long term, Supino has growing concerns about 2024-25 growth forecasts. 

His prior Outperform thesis anticipated Netflix leading the industry transition from landgrab to efficiency by monetizing existing viewership via AVOD and 100 million global password sharers. 

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With reports of slow AVOD adoption, recent ARM shortfalls signaling trade down, management signaling less margin expansion, and a lack of compelling 3P data on subscriber growth, he believes the risk/ reward for NFLX is balanced. 

In the medium term, the two most prominent drivers of NFLX's multiple looks increasingly risky. The net adds look vulnerable, as per the analyst, due to planned price increases, Basic tier elimination, and higher penetration/ pull-forward attributable to paid sharing. 

Near-term ARPU should remain pressured by paid sharing-related trade-downs, emerging market price cuts, and unfavorable geographical mix. 

Consensus FY24 revenue estimates rely on strong ARM growth (prices and advertising) and net adds.

Supino lowered his CY24E net adds to 11 million (vs. 16 million consensus) as the paid sharing catalyst fades and price increases weigh on net add.

Price Action: NFLX shares traded lower by 2.26% at $353.04 on the last check Friday.