Investors are again taking bullish bets on Netflix Inc., but analysts continue to urge caution for a company at the center of an unprecedented transition.
On Oct. 18, Netflix reported a third-quarter earnings beat, including 2.4 million paid net membership additions over guidance of 1.0 million. The company also excited its investor base with commentary around a low-cost, ad-based tier coming in November, as well as new details about a password-sharing crackdown that will take effect in 2023.
Both tactics should give the company new opportunities for revenue growth, analysts said. The confluence of news led Netflix's shares to a 13% increase on Oct. 19 to close at $272.38.
However, Netflix's strategic initiatives were implemented to stave off a collapse in growth that began in early 2022 as competition mounted and its model matured. As such, its path forward is uncharted.
"We continue to see Netflix as the clear market leader in streaming, but still a maturing business in a highly competitive market facing a global consumer under increasing economic stress," Morgan Stanley Research analyst Benjamin Swinburne said in a note, maintaining an Equal Weight rating and a $230 price target. "We see the risk/reward fairly balanced."
Netflix managed to outstrip its third-quarter guidance all around, including subscriber gains, revenue and income. The company also issued fourth-quarter guidance of 4.5 million paid net membership additions, above Wall Street forecasts.
Ahead of earnings, some analysts expected Netflix to miss its revenue number due to currency headwinds. Instead, Netflix posted revenue of $7.93 billion compared to guidance of $7.84 billion.
On profits, the company reported third-quarter EPS of $3.10 compared to guidance of $2.14 and consensus expectations of $2.17, according to S&P Capital IQ consensus estimates. That implied an operating margin of 19.3% in the third quarter.
Notably, Netflix managed to generate growth in each of its geographic regions, easing fears that its most lucrative markets, the U.S. and Canada, are shrinking. While the domestic region was still nearly flat, adding only 100,000 customers, the advertising strategy should also favor domestic profits, analysts said.
"Netflix is well-positioned in this murky environment as it shifts its strategy, and should be valued as an immensely profitable, slow-growth company," Wedbush Securities analyst Michael Pachter said in an Oct. 19 note. "We do not believe that Netflix's share price will approach 2021 levels for many years, but we raise our price target to $325 from $280."
Other analysts were less bullish, arguing that the stock price jump was overblown.
"Netflix's 3Q metrics are not supportive of where the market has pushed the stock up to today. As is the case with Walt Disney Co., the bulk of the past year's subscriber growth is coming from the lowest-[revenue] region," MoffettNathanson analyst Michael Nathanson said in an Oct. 19 note, maintaining a "market perform" rating and raising his price target by just $10 to $230. "We believe that the most bullish Netflix forecasters have overestimated the near-term earnings power of Netflix."
Several of Nathanson's peers also held a cautious line despite the outperformance. Investors are witnessing an existential shift, not only for Netflix but for the entire video entertainment industry, and Netflix is out in front of that shift.
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"[Netflix] is a stock in transition as the business matures into something more multi-faceted. Over time that should make it more stable, but the evolution has been painful," Wells Fargo Equity Research analyst Steven Cahall said in an Oct. 18 note with an Equal Weight rating and $300 price target.