Netflix Investors Hit The Buy Button After Q3 Earnings, But Analysts Are Cautious On Ad-Supported Plan: Here's Why

Zinger Key Points
  • An ad-supported platform launch by Netflix may impact subscriber gains more slowly than expected.
  • Analysts remain cautious on Netflix but raised price targets after earnings report.
Netflix Investors Hit The Buy Button After Q3 Earnings, But Analysts Are Cautious On Ad-Supported Plan: Here's Why

Shares of Netflix Inc NFLX rose sharply Tuesday after the market close after the streaming giant reported third-quarter financials that beat analysts’ expectations.

The Street is sharing updated thoughts on what’s ahead for Netflix as it works to return to growth and launch its ad-supported platform.

The Netflix Analysts: Credit Suisse analyst Douglas Mitchelson has a Neutral rating on Netflix and raised the price target from $263 to $271.

Benchmark analyst Matthew Harrigan has a Sell rating and raised the price target from $157 to $162.

Morgan Stanley analyst Benjamin Swinburne has an Equal-Weight rating and raised the price target from $230 to $250.

Raymond James analyst Andrew Marok has a Market Perform rating and no price target.

Rosenblatt analyst Barton Crockett has a Neutral rating and raised the price target from $201 to $226.

KeyBanc analyst Justin Patterson has a Sector Weight rating and no price target.

Bank of America analyst Nat Schindler has an Underperform rating and a price target of $196.

Related Link: Here's How Much Netflix's Ad Supported Plan Costs And How It Compares To Rivals 

The Netflix Takeaways: Mitchelson was impressed with fourth-quarter guidance of 4.5 million net paid subscriber additions versus a Credit Suisse estimate of 4.3 million. The analyst was cautious on comments made about the ad-supported plan rolling out in November.

“Mgmt indicated they expect the new ad tiers would be neutral-to-accretive to comparable basic tier ARPUs, suggesting the potential for dilution relative to average ARPUs across the basic/standard/premium tiers,” Mitchelson said.

Mitchelson said comments from Netflix suggest modest inflow of subscribers for the ad-supported plan at launch, making a goal of 10% revenue growth unclear to the analyst.

Harrigan, who has a Sell rating, is cautious to have too much optimism in Netflix after shares gained 14% on the earnings report.

“We remain cautious on Netflix despite the stocks’ 14% post market advance in response to yesterday’s earnings and 4Q22 guidance,” Harrigan said.

Harrigan is also cautious on Netflix going forward as the company said it would not report member growth after the fourth quarter. A hit show released in the third quarter could also be a reason for the strong report, according to the analyst.

“Although Netflix achieved 7.6% viewing share in August 2022 per Nielsen’s Gauge, this was heavily supported by the return of top show Stranger Things and may not be sustainable as disciplined streaming competition increases.”

Swinburne was encouraged by the subscriber gains in the third quarter.

“The growth strategy is set, now comes the execution,” Swinburne said.

The analyst said there could be benefits for Netflix with lower priced ad-supported platforms but it could be priced into shares.

“The headwinds to growth that have weighed on the business recently remain – product maturation, competition, and macros headwinds.”

Marok said the third quarter earnings and subscriber gains were “solid” but urged caution on the ad-supported plan.

“While the company continues to express optimism on the demand for the product and the ability to monetize at or above current Basic levels, we remain cautious on the pace of uptake and the company’s ability to maintain premium ad pricing with little targeting and measurement capability,” Marok said.

Crockett raised the price target on Netflix calling the third quarter subscriber beat “positive, but not monumental.”

“Netflix plans to stop guiding for net sub adds from here,” Crockett said. “That’s probably good, because the company, on a base this large, can’t get that number right.”

Crockett said The Walt Disney Company DIS could have the better ad-supported streaming platform launch plan.

“The bigger ad play in 2023 appears to be Disney+, which is making ads standard across its service, and requiring users to switch to a pricier service tier to avoid them. Disney seems positioned to have more eyeballs in streaming ad plans than Netflix.”

A slower ramp up of the ad-supported plan was a key highlight for Patterson.

“Netflix’s 3Q results did little to settle bull and bear debates about the size of 2023 monetization initiatives and the rate of margin expansion,” Patterson said.

Schindler was unconvinced by the third-quarter earnings report from Netflix, with part of the subscriber gains likely coming from Stranger Things content.

“We think Netflix has very few high-impact original shows for Q4,” Schindler said.

NFLX Price Action: Netflix shares are up 13.09% to $272.38 on Wednesday.

"Stranger Things" screenshot courtesy of Netflix.

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