As the closing bell nears, Netflix (NFLX) gears up to release its fiscal third-quarter (Q3) earnings on Wednesday, with investors eagerly awaiting updates on several pivotal fronts. These include the company’s efforts to combat password sharing, advancements in ad-supported offerings, and the potential for further price adjustments.
The streaming giant Netflix, which recently experienced downgrades on Wall Street, disappointed stakeholders in the second quarter when revenue fell short of projections, and its Q3 earnings forecast proved to be lighter than anticipated.
This revenue shortfall stems from the delayed emergence of the company’s advertising tier, imperiling its ambition of achieving double-digit revenue growth. Netflix CFO Spencer Neumann acknowledged the challenges, stating, “We’re still in the crawl of the crawl-walk-run stage, so it is not easy to build an ad business from scratch. We got a lot of work to do,” regarding the ad tier last month.
Moreover, Netflix reported lower-than-expected ARM (average revenue per membership) and forecasted that ARM in Q3 would remain either steady or slightly lower compared to the same period in 2022. This is despite an anticipated surge of 6 million new subscribers in the third quarter driven by the password crackdown.
According to Bloomberg consensus estimates, Wall Street anticipates the following:
– Revenue: $8.53 billion
– Adjusted earnings per share (EPS): $3.56
– Subscribers: 6.2 million net additions
Analysts have emphasized the long-term perspective, cautioning investors that many of the company’s initiatives may not significantly impact its bottom line until the following year. Wells Fargo analyst Steve Cahall noted, “NFLX will be investing in ad tech and content, which will reduce margin expansion but also accelerate revenue,” in a recent report. While Cahall lowered his price target on the stock to $460 a share, down from the prior $500, he maintained an Overweight rating, expressing optimism about long-term growth.
Netflix shares, which have witnessed a 20% decline over the past three months, are presently trading around $355.
Margins have been a key concern for investors, particularly after CFO Neumann projected full-year operating margins, which peaked at 21% in Q1, to range between 18% and 20%. This aligns with company expectations, although consensus estimates hover just below 20% for full-year 2023. Neumann remains optimistic, anticipating margins to “tick up again going forward” as growth strategies take hold, alongside other drivers such as the company’s entry into gaming and expanded licensing opportunities.
Cahall observed, “We’re seeing more content coming to market, with ‘Suits” success on NFLX marking a paradigm shift that reinforces how much more valuable library can be on the leading platform.” He added, “We think ‘Friends,’ HBO library titles and even Disney content could come to market.”
While licensing more content will undoubtedly enrich Netflix’s library in the long run, especially amidst the ongoing Hollywood strike, it could potentially strain margins as content costs escalate.
Recently, The Wall Street Journal disclosed Netflix’s intention—still unconfirmed by the company—to raise the price of its ad-free streaming tier post the resolution of the actors’ strike. The exact timeline and the extent of the rumored increase, currently at $15.49 per month, remain undisclosed. This move echoes similar strategies employed by competitors in the industry. Netflix declined to comment on the report.
Source: Yahoo Finance
