Netflix shares tumbled more than 8% on Wednesday after the streamer missed Wall Street earnings expectations and a Brazilian tax dispute weighed on the company’s operating margin.
“Netflix’s earnings were definitely not what we wanted to see as the opener for this earnings season. Although the tax litigation issue certainly had an impact — particularly on margins — the truth is that the company failed to deliver the kind of growth we’ve grown used to over the past couple of years,” Investing.com senior analyst Thomas Monteiro said. “That matters not only for what the internal numbers say about the streaming giant itself, but also because it suggests many of the tailwinds that drove a phenomenal Q2 season may have partially cooled off in Q3.”
Monteiro said that the quarterly numbers suggest that Netflix’s price-hiking power “may be nearing a short-term peak” that “doesn’t bode well given the lofty EBITDA growth expectations currently priced into its shares.” He added that it “casts a shadow over the broader path of discretionary spending during the period, even in the face of tamed inflation.”
Despite the earnings miss, the company saw revenue growth of 17.2%, driven by pricing adjustments, subscriber growth and increased ad revenues. And Wall Street remains largely bullish on the stock overall.
“It is well understood in the market that Netflix is the leading company in the streaming video entertainment industry, which we think is fully reflected in the stock price, along with expectations for sustained double-digit revenue growth over the next five years,” Deutsche Bank analysts Brian Kraft and Benjamin Soff said. “This past quarter’s results did deliver a headline miss; however, the underlying fundamentals are very much intact.”
J.P. Morgan Chase analyst Doug Anmuth noted that the Brazil tax expense “creates noise, but it’s not an issue” and that the bigger areas of focus are the “lack of revenue upside” in the back half of the year and Netflix keeping the door open for M&A after being asked about its reported interest in Warner Bros. Discovery.
MoffettNathanson analyst Robert Fishman also said Netflix “sits in an enviable position across the streaming landscape” and still has “numerous levers to pull to drive higher monetization of its global subscriber base and best-in-class (paid) engagement.”
Fishman sees the company’s pricing strategy leading to a “meaningful future
opportunity to drive not only upside in subscription revenues but also material advertising growth.” He expects further adoption of Netflix’s in-house ad tech platform and a boost from a growing list of ad partners, including Amazon. MoffetNathanson forecasts Netflix will reach $2.7 billion in ad revenue in 2025, $5.4 billion in 2027 and over $9 billion by 2030.
Additionally, the firm believes “higher and more efficient content spending” in the years to come as the company focuses more on sports and live events should lead to better monetization and translate into higher profits. Fishman also says the company is in the early stages of monetizing its IP through alternative revenues like consumer products, citing Netflix’s “KPop Demon Hunters” partnership with Mattel and Hasbro.
Netflix shares are up 48% in the past year, 27.9% year to date and 9% in the past six months, but are down 7.5% in the past month.
