Shares of Netflix (NFLX) experienced a significant downturn on Friday, prompted by a Wall Street downgrade that cited concerns over the company’s growth prospects. Wolfe Research, a prominent financial analysis firm, downgraded Netflix’s stock from ‘Outperform’ to ‘Peer Perform.’ The move was attributed to apprehensions that potential gains from revenue-generating strategies, such as paid sharing and an ad tier, might not outweigh the associated risks regarding future growth.
Wolfe Research’s analyst, Peter Supino, went on record stating that he has removed the previously held $500 price target for the stock. Supino acknowledged that while the streaming powerhouse is poised to augment its share of global premium video revenue through long-term advertising initiatives, there exists an elevated level of uncertainty surrounding the growth projections for the years 2024 to 2025. “If future growth falls short, we doubt that NFLX’s 50% price to earnings per share ratio and 70% enterprise value/EBITDA premium to the S&P would hold up,” Supino emphasized in his analysis.
Netflix recently reported a growth rate in the second quarter that fell below expectations. Additionally, the company forecasted that the average revenue per membership (ARM) in the third quarter of this year is expected to remain either flat or exhibit a slight decline compared to the corresponding period in 2022. Further exacerbating concerns, during a recent conference hosted by Bank of America (BofA), CEO Reed Hastings conveyed a more conservative outlook, signaling a potential contraction in margins.
Supino highlighted two pivotal drivers influencing Netflix’s stock valuation—net subscriber additions and operating margins—as increasingly precarious. This assessment takes into consideration planned price hikes, a recent crackdown on password sharing, and statements made by Neumann, among other factors. “With reports of slow AVOD adoption, recent ARM shortfalls signaling trade down, management signaling less margin expansion, and a lack of compelling third-party data on sub growth, we believe the risk/reward for NFLX is balanced,” Supino concluded.
Netflix is scheduled to disclose its fiscal third-quarter results on October 18. Although the company’s stock has demonstrated a commendable 20% surge year-to-date, it has concurrently experienced a 20% decline over the past three months. Consequently, the forthcoming earnings report holds substantial implications for the company’s trajectory in the stock market.
In the wake of the Wall Street downgrade, Netflix finds itself at a critical juncture, with Wolfe Research cautioning that the potential gains from its revenue-generating initiatives may be eclipsed by the risks associated with future growth. Analyst Peter Supino’s withdrawal of the $500 price target underscores the evolving risk profile, with net subscriber additions and operating margins emerging as pivotal areas of concern. The company’s performance in the upcoming fiscal quarter will likely be closely scrutinized, as it grapples with the challenge of meeting or exceeding market expectations.
Source: Yahoo Finance
