Netflix Stock Surges After Earnings—But Analysts Divided About Whether Growth Can Recover

Topline

Wall Street analysts are split on Netflix, following the company’s second-quarter earnings report, with some predicting the stock is set for a rebound after the latest subscriber loss wasn’t as bad as feared, while others think the company still has a long way to go with its plan to restart growth.

Key Facts

Shares of Netflix popped over 7% on Wednesday as investors reacted positively to the company’s second-quarter earnings report: The streaming giant reported a loss of 970,000 subscribers, far less than the 2 million it had previously forecast.

A shocking subscriber loss in the first quarter had led to a wave of downgrades from Wall Street analysts, who called into question the company’s long-term growth plan, but after the latest results, some experts have now grown more optimistic Netflix could soon recover.

The stock’s post-earnings rally could signal that a bottom is near, assuming subscriber growth doesn’t “hit any new cliffs,” according to Wells Fargo analyst Steven Cahall, who remains bullish about the company’s plan for a new ad-supported subscription tier, which should start to pay off next year.

Stifel analysts upgraded Netflix to a “buy” rating on Wednesday, arguing there are “signs of stabilization in the subscriber base,” which makes the prospect of a “prolonged period of subscriber losses . . . increasingly unlikely.”

Others on Wall Street remain highly skeptical, with analysts at Bank of America calling the earnings “better than feared, but still not great,” adding that the company didn’t provide as much information as expected on its plans for advertising on the platform.

The firm has a “sell” rating on the stock and lowered its price target to $196 per share based on “higher content costs,” as well as more “technology spend on ad integration,” which may affect future earnings.

Key Background

Shares of Netflix are down nearly 70% this year as investors grew concerned about the company’s slowdown in subscriber growth. The stock plunged 35% in one day after the company reported its first subscriber loss in more than a decade during the first quarter, spooking Wall Street analysts. In an attempt to offset the recent slowdown in growth, Netflix announced earlier this year that it will be introducing a cheaper, ad-supported subscription tier—though management has recently said that the project remains in “very early days.”

Crucial Quote:

Amid a “mostly disappointing result” from Netflix, analysts at Pivotal Research Group downgraded the stock to a “sell” rating. Though the streaming giant plans to introduce an ad-supported tier in early 2023, that is “likely to not increase subscriber growth in core markets,” especially given “increased competition” from rival streaming services, according to Pivotal. What’s more, the firm remains concerned that, unlike competitors such as Apple, Amazon, Google and Disney, Netflix “does not have alternative high-margin businesses” they can use to help “monetize their streaming efforts.”

What To Watch For:

Investors should take a wait-and-see attitude to Netflix shares after the latest earnings report, says Needham analyst Laura Martin. Where do subscriber losses end, “given strong competition from newer, lower-priced, deeper-pocketed streaming services?” she asks. Netflix is likely to be the primary source of other streaming services’ subscriber growth, “if only because it is the entrenched incumbent with the most subscribers,” Martin adds.

Further Reading:

Netflix Shares Jump Over 6% After It Reports Smaller Subscriber Loss Than Forecast (Forbes)

Netflix Partners With Microsoft For Ad-Supported Service Amid Subscriber Losses (Forbes)

Netflix Stock Crash: Growth Story Is ‘Dunzo For Now’ As Analysts Slash Outlooks (Forbes)

Netflix Loses Subscribers For The First Time In Ten Years, Shares Plunge 35% (Forbes)