The streamer’s shares plunged as some analysts said a planned change to its financial reporting signals a growth slowdown ahead
Other tech companies have pulled back on financial disclosures as they’ve grown, and now Netflix will do the same.
Wall Street tends to focus more on the future than the present, and that’s especially the case in the wake of Netflix Inc.’s latest report.
Specifically, analysts are debating the merits of Netflix’s announcement that it will stop providing quarterly disclosures on subscriber growth or average revenue per member after the end of this year. That’s one factor weighing on Netflix shares, which fell 9.1% in Friday action to suffer their worst single-day percentage decline since April 20, 2022, when they plunged 35.1%, according to Dow Jones Market Data.
On one hand, numerous technology giants, including Apple Inc. and Meta Platforms Inc., have cut back on various disclosures in what’s seemingly “a rite of passage for large tech companies,” according to Bernstein analyst Mark Shmulik, who said the presence of subscriber numbers likely “overfocuses” Netflix investors on one key metric.
“On the other hand, removing growth disclosures signals a maturing business, and gives shareholders even fewer data points to underwrite forecasts,” Shmulik added, as he reiterated a market-perform rating on the stock but bumped his price target up to $600 from $490.
MoffettNathanson’s Michael Nathanson wonders how much more room there is for Netflix to benefit from its crackdown on account sharing now that “the lowest-hanging fruit has already been captured.”
With that backdrop, Netflix’s planned change to its financial reporting “can be read more cautiously that subscriber growth has indeed peaked —particularly in higher [average-revenue-per-member] markets — and a deceleration may lie ahead,” Nathanson said.
“Netflix may have room to grow its share of its subscribers’ content consumption, but we may be nearing saturation in terms of total number of subscribers in developed markets,” he added.
Nathanson’s uncertainty about the sustainability of Netflix’s recent subscriber momentum is one factor that keeps him sidelined on the stock, with a neutral rating and a $505 target price, up $5 from before.
Barton Crockett of Rosenblatt Securities had a similar take on the upcoming change.
“That looks like a transition into a more mature phase, and suggests what we expect — that the member growth pace has peaked and will decelerate,” he wrote. “We find it less likely that Netflix shares would outperform while the market digests this transition.”
Crockett rates the stock at neutral, and he cut his price target to $540 from $554 on Friday.
But others were more forgiving — including Jeff Wlodarczak of Pivotal Research Group, who boosted his price target to $800, a new Wall Street high. His earlier $765 target had also been the previous high.
“We remind investors that [Apple stopped] disclosing iPhone unit growth in [the fourth quarter of] 2018 and after a short period of stock consolidation the stock materially outperformed the market,” he wrote.
Wlodarczak expects to see a slowdown in subscriber growth next year but still sees ”a long runway” for growth in both subscribers and average revenue per member. He has a buy rating on Netflix’s stock.
The Apple comparison rang true for Tim Nollen of Macquarie, as well.
“Investors will complain about lack of metrics to use, but we welcome the decision — recall Apple did this with iPhone units to focus the street toward more important fundamental metrics — with the hope that Netflix will provide more meaningful engagement metrics and more ad tier-related info over time,” he said in his report.
Nollen has an outperform rating and a $685 target price on the shares.
Guggenheim’s Michael Morris also defended the stock.
“Eliminating regular reporting of membership data raises questions around management’s confidence to further grow the base, though it is not implausible that the change is intended to reduce quarterly sentiment volatility around relatively small changes in true economic drivers,” he wrote, as he kept a buy rating and a $700 target price on the stock.