Streaming giant Netflix is set to report its Q3 earnings on October 17th.
Concerns about subscriber growth may be affecting Wall Street’s consensus on Netflix shares.
The company is projecting double-digit revenue growth and an increase in margins as it moves toward advertising for monetization.
Netflix is poised to report its third quarter 2024 financial results and business outlook post-market on Thursday, Oct. 17, 2024.
Netflix's Q3 revenue is expected to be $9.77 billion, rising 14.37% compared to the last year. Net income grew to $2.24 billion, or $5.16 per share, according to Bloomberg's consensus expectation. Yet new additions are expected to be 4.27 million, 51.3% lower compared to the same period last year.
Subscriber Growth Poised to Slow in 3Q
Subscriber growth remains a key metric that could influence the market’s reaction to Netflix’s Q3 results. Netflix net additions are to be sequentially lower in Q3. It is estimated that net streaming subscriber additions would be 4.27 million in 3Q vs. 2Q's blowout with 8.05 million, which got a bump from the password crackdown.
However, there should be less pressure on subscriber performance in general now, since Netflix will no longer be reporting the metric next year. Levels of subscriber additions are taking less effects on revenue growth. Consensus expectations show that revenue growth and margins will realize a double-digit growth despite net subscriber additions fall 51% in 3Q.
As the business matures, the company is shifting from the “growth in numbers” phase to a “monetization growth” phase, with advertising playing a significant role.
By eliminating its basic plan, Netflix is nudging users toward its ad-tier option, which is a smart long-term strategy that expands potential ad revenue. Therefore, Netflix’s progress in advertising may be as crucial, if not more so, than subscriber growth in Q3.
Netflix Set for Lift From New Content, Price Hike
Netflix is expected to benefit from a long runway for revenue growth and a deepening competitive moat. Sustained momentum in paid sharing and ad-monetization tailwinds as well as solid underlying trends are in focus in 3Q.
Following "peak TV" and recent strikes, Hollywood's new normal favors Netflix, with reduced competition for content and media studios open to licensing again. The ad-tier introduction would also help raise revenue.
The streaming company is expected to extend a pricing increase announced a year ago for premium subscribers in the US, the UK and France to other regions, and implement an 8% to 15% increase to the standard plan. A robust Q3 viewing, along with a strong Q4 content slate that includes two NFL Christmas Day games, will likely reduce churn risk
A surge of highly anticipated content is expected in 4Q, including "Jake Paul vs. Mike Tyson," Christmas day NFL games and "Squid Game 2," to drive better engagement and could also support a price hike on the ad-free tier. Though the ad tier is weighing on ARM (Average Revenue Per Member), it to improve in 2025 on in- house ad tech and ad partnerships.
Analysts’ Opinions
Barclays analyst Kannan Venkateshwar moved to an underweight rating. Venkateshwar worries that it will be tougher for Netflix to maintain at least low-double-digit revenue growth in the future, something he said the stock's "premium valuation" demands.
He noted that Netflix has many strengths, which have helped the company build itself into a media powerhouse. Lately, though, Netflix has needed to try new tactics to jolt revenue, and Venkateshwar said that while a crackdown on account sharing seems to be working, it could be coming at the expense of future growth.
Piper Sandler analyst Matt Farrell stepped up to a overweight stance. From Farrell's perspective, Netflix doesn't need to rely on its past levels of subscriber growth to grow revenue at a double-digit clip. Additionally, there should be less pressure on subscriber performance in general now, since Netflix will no longer be reporting the metric next year.
He's also upbeat about margin trends - at least relative to expectations in the market. "While we don't expect 2024-level margin expansion moving forward, we think consensus margins could prove to be conservative in both 2025 and 2026," he wrote.
Oppenheimer lifted its price target for Netflix stock to $775 from $725. Netflix will need to deliver strong Q3 financial results and guidance, after the stock gained 13% since its Q2 results, and is likely to announce a pricing increase to keep the momentum going.
Oppenheimer raised its average revenue per membership estimates for Netflix by 2% for Q4 and full-year 2025 and 2026 to reflect the anticipated price increase. It also increased earnings per share projections for those periods by 3%.
Morgan Stanley said it is bullish on NFLX shares as it sees a long runway for revenue growth, above consensus expectations for operating leverage and EPS, and a deepening competitive moat, among things.
"The key to Netflix's success stems from generating more value from each dollar invested in content. Content amortization is its largest expense item (over 50% of its opex base in '24), and leveraging this investment is key to long-term earnings growth. Throughout the roller coaster that has been 2019 to 2024, its revenues have grown at a +14% CAGR vs. cash content spend of just +3%," Morgan Stanley analysts said in their October 9 note.
Citi Research stayed "neutral" on NFLX and said they see a possibility for the company to raise its prices in the U.S. by 12%, given its low cost per viewed hour.
However, they also pointed out that NFLX may require revenue grow of ~15% if it has to generate $25 of EPS in 2025. They argued that even if Netflix adds 20M subs and raises U.S. prices by 12%, non-U.S. ARPUs would need to rise 6% to achieve ~15% revenue growth in 2025, which they view as unlikely.
"We expect Netflix’s stock to trade higher on a U.S. price hike announcement, but we would expect shares to eventually trade lower as investor’s hopes for $25 in 2025 EPS are dashed," Citi said.
