Streaming giant Netflix Inc NFLX reported quarterly results this week that saw the company beat Street estimates. An analyst shared 10 surprises from the earnings report.
The Netflix Analyst: Needham analyst Laura Martin has a Hold rating on Netflix and no price target.
The Analyst Takeaways: Martin shared 10 surprises from the Netflix third-quarter earnings report, which are as follows:
1. Netflix's ad-supported plan doesn’t have targeting at launch.
“Header bidding was invented 7 years ago, why is Netflix’s ad tier using insertion orders with almost no targeting available at launch?” Martin said.
2. Netflix to stop guiding on subscriber numbers after the fourth quarter.
“What surprised us most was that NFLX said it would stop guiding to sub adds after this quarter. We assume NFLX said it would stop guiding to sub-adds after this quarter. We assume Netflix isn’t doing this to hurt itself, which implies that its new ad-driven tier plus password-sharing crackdown in 2023 still won’t be enough to reverse sub declines.
3. Ad-supported plan from Netflix is a product Netflix will improve over time, Martin said.
“This strategy surprises us because this ‘move fast and break things’ Silicon Valley strategy is typically used with consumers who pay nothing and have no power.”
Martin sees downside risk from this strategy if something goes wrong.
4. Netflix’s belief in the $7-per-month pricing tier is that it will gain new subscribers and not see existing users trade down.
“Third-party surveys don’t support this view. Studies suggest cannibalization of higher-priced tiers, which would represent a headwind to NFLX’s revenue growth.”
5. Advertising to be margin accretive “over time,” Martin said.
“That surprises us since ads typically have 70% to 80% incremental margins and Microsoft is Netflix’s tech stack. This implies Netflix is adding costs associated with the ad tier and ROIC assumptions for its ad tier are too high near term.”
6. Advertisement demand is strong for Netflix initially.
“Netflix said it was turning away advertisers, and it was almost sold out. That implies many fewer ad units ‘avails’ than we had assumed, implying lower upside from ad revs near-term.”
7. Fee premium being sought by Netflix versus competition because of better content. Martin said she is surprised by this strategy.
8. Selling bundle deals already with partners like mobile carriers.
9. Netflix targeting $3 per month per user in advertisement revenue on the ad-supported plan. Martin said this works out versus the $10-per-month current plan but won’t work if people on premium plans trade down to the $7-per-month plan.
10. Netflix releasing the “Knives Out” sequel in theaters including AMC Entertainment Holdings AMC and Cinemark Holdings CNK locations early. The movie will release on Netflix’s streaming platform one week later.
“This is a turnabout for Netflix, which historically has strongly preferred to make content that airs first on Netflix exclusively. Yet another strategy pivot that suggests that Netflix is lost about how to improve its business model.”
NFLX Price Action: Netflix shares are down 2% to $267.09 on Thursday.
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