Truist cuts Netflix estimates, stays on sidelines into earnings

A look ahead at Netflix's (NASDAQ:NFLX)$Netflix(NFLX)$ highly anticipated earnings report has led to newly lowered estimates at Truist Securities, which is staying Neutral on the stock as it evaluates the advertising opportunity ahead.

Mobile app download growth - a proxy for gross subscriber additions - decelerated a bit in the second quarter, thanks to slowdowns in the U.S./Canada and Asia Pacific, analyst Matthew Thornton says. And he's in line with his expectations on subscribers (after the company guided to a 2M drop in subs), implying a modest improvement in churn.

He's now expecting revenues to come in slightly worse than the rest of the Street, at $7.97B, with EBIT of $1.73B. That's due to expectations that foreign exchange will become a 2-point-plus headwind by the end of the quarter compared to when Netflix issued guidance.

Looking ahead to the third quarter, assuming a 2M-subscriber drop in Q2, he notes "recent seasonality" implies gains of 0.8M to 2.1M; he expects 1.5M net adds, benefiting from a stronger content slate. He sees Q3 revenues at $7.9B, vs. consensus for $8.12B.

Turning to the advertising story: The planned ad-subsidized service tier could add $1B in incremental revenue by 2025 - if it launches in 2023, and an incremental $0.9B in revenue across international (assuming a 2024 launch there), he says.

The company is benefiting from improved risk/reward, he points out (an unsurprising development after Netflix (NFLX) lost half its market value this year), and as low-cost entertainment is likely to be more durable in a recession vs. areas reliant on brand advertising, or larger-ticket consumer purchases. But competition is still rising, macro factors will have an impact on churn, and there's "low visibility" from here.

He's trimmed his price target to $210 from the previous $300; the stock is up 2.1% today and so the target currently implies 18% upside.