It’s earnings season, and Netflix (NFLX 0.81%) always clocks in early with its fresh financials. There’s a lot riding on the numbers that Netflix will be putting out shortly after Thursday’s market close.
There are plenty of moving parts to Netflix these days. Let’s go over some of the things that may hold the stock back after this week’s earnings report.
1. The stock is already on a roll
Like many growth stocks, Netflix was a big loser in 2022. The shares shed more than half of their value last year, but Netflix stock is up 38% since the company announced its third-quarter results three months ago. The market is up just 8% in that time.
Shares on the way up are obviously a sign of bullish momentum, but it also raises expectations. A strong report is likely already discounted with the recent stock surge. Some analysts are either upgrading the stock or boosting their price targets on Netflix ahead of Thursday’s report. It’s an encouraging sign, but it also means that Netflix has a lot of pressure to crank out a perfect report.
Andrew Uerkwitz at Jefferies boosted the rating on the streaming video pioneer from hold to buy on Thursday, lifting the stock’s price goal from $310 to $385. A day later it was Jason Helfstein at Oppenheimer increasing the target on the shares from $365 to $400. Wall Street’s excited. Investors are clearly excited after the 38% rebound over the past three months. There’s a lot for Netflix to prove this week.
2. Ad revenue may not pay off right away
Companies that lower prices are often slammed on fears of contracting margins, but that didn’t happen when Netflix introduced a basic ad-supported tier for subscribers at just $6.99 a month, a 30% discount to the commercials-free plan. The market rallied on the news, and things got even better in October when Netflix mentioned it should be able to more than make up the $3 difference on the cheaper plan through ad revenue.
It makes sense. Marketers finally have a way to reach the historically elusive Netflix viewer. However, last month saw a problematic report out of Digiday, claiming that Netflix is returning unused inventory its initial advertisers. Refunding advertisers isn’t a good look. Are thrifty users not flocking to the cheaper tier? Are those subscribers not streaming as much content as expected? Is Netflix serving fewer ads than it was modeling to fend off dissatisfaction? The answer to one or more of those questions could be in the affirmative, and that may trip up the recent rally in its tracks.
3. Netflix might not be recession-resistant
A bullish argument for Netflix is that it should hold up well during a market downturn. With consumers likely paring back on premium social outings and other entertainment expenditures if the economy continues to weaken, Netflix is a bargain with monthly plans now starting at less than a quarter a day.
Helping keep the lore alive, Netflix was one of the few stocks to move higher in 2008 as the general market plummeted in the wake of the subprime lending crisis. Netflix is the gold standard of streaming media stocks, but it has competition for low-priced entertainment subscriptions now. A rare negative analyst note last week came from Kannan Venkateshwar at Barclays, arguing that subscriber growth for the fourth quarter is trending below Netflix’s own guidance calling for 4.5 million in net additions for the quarter. Venkateshwar is now modeling just 2.7 million more subscribers than it had three months earlier.
The long-term prognosis continues to be bullish for Netflix, and it remains my largest holding. I hope I’m wrong, but if the stock buckles after Thursday’s fourth-quarter announcement, the signs were already out there.