Netflix Earnings Reaction: Stock Rises In Early Trading As Bulls And Bears Debate Second Quarter Takeaways

After Netflix’s better-than-expected second quarter earnings yesterday, the company’s shares continued their recent upturn as Wall Street analysts took sides on the takeaway from the report.

Netflix stock was up almost 4%, above $209, in morning trading on twice its normal volume. It has risen 15% in the last two weeks, breaking above $200 yesterday for the first time since April (though still far below its high of $700 in November 2021).

After weeks of anxiety, Netflix quieted many doubters by reporting a loss of 970,000 subscribers in the period and earnings per share ahead of analysts’ consensus estimate. The company had warned of a loss of 2 million and some analysts predicted the pullback could be as great as 4 million. Even so, skeptics point out, the loss was the biggest in any quarter in the company’s 25-year history.

Michael Morris, an analyst with Guggenheim, greeted the results favorably. He reiterated his “buy” rating on the stock and kept his 12-month price target at $265. “Key opportunities in advertising and password sharing are taking shape,” he wrote in a note to clients. “Notably, the company’s ambitious pursuit comes with spend discipline, with annual cash content spend of $17 billion in ‘the right ZIP code’ for the next several years.”

Michael Pachter of Wedbush also singled out the financial discipline on the cost side as a big reason why he has an “outperform” (buy) rating on the shares. “We are confident that Netflix is prudently positioning itself as an immensely and increasingly profitable company as long as its revenue growth remains relatively low,” he wrote in a research note. “We think its guidance for 2022 free cash flow of roughly $1 billion and annual growth from there essentially underscores the bull case for the stock.”

Bears were just as convinced that the glass is half-empty, however.

Tim Nollen of Macquarie Research reiterated his “underperform” rating on Netflix shares, but complained in a note to clients that key new revenue drivers like advertising and password sharing fees are still as much as a year away from becoming reality. “Some stability in subs is good,” he wrote, “and management’s tone sounded much more reassured this time than the last two; so, Netflix stock could enjoy a short relief rally. But there is still some way to go to turn numbers around, while sub adds are only tracking to flat through Q3, and we don’t know what the effect of a recession may be on subs.”

Michael Nathanson of MoffettNathanson has a “market perform” (neutral) rating on Netflix shares, but echoed Nollen’s concern about the timeline of advertising coming into the picture. He expects the impact on the company balance sheet won’t be felt until 2024, which he called “a lifetime away in this current streaming environment.”

In a note to clients, Nathanson likened Netflix’s evolution to other consumer-facing businesses that have seen a slowdown in volume growth along with a corresponding increase in pricing out of alignment with a rise in the price of general consumer goods. (Examples include pay-TV, broadband, CDs, DVDs and theatrical moviegoing.) Not only do these dynamics present a dilemma, but Nathanson has concerns about Netflix taking its foot off the gas in terms of content spending.

“As Netflix pivots into a new era of slowing top-line growth, the company will now need to slow down content spend in an intensely competitive market with deep-pocketed entrants like Apple (not rated) and Amazon (not rated) … or even Disney,” he wrote. “This dynamic is unlike other media sectors that we have observed. When Pay TV growth or DVD slowed, the hit to underlying economic models forced all market participants to re-assess their level of spending. In streaming, the risk is that a slowdown in content investment at Netflix could lead to even slower revenue growth as the creation of ‘hits’ is often a random walk.”

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