As Netflix prepares to reveal its earnings after market on Tuesday, there's a palpable anticipation in the air.
The streaming giant seeks to showcase a resurgence in growth after grappling with the pandemic's aftermath. With the stock having surged over 40% since the last October report, which exceeded subscriber expectations, Wall Street remains optimistic about sustained growth.
Projections hint at an 11% revenue increase in the fourth quarter, marking its swiftest expansion in two years.
Potential Pitfalls: Balancing on Thin Ice
Despite the positive momentum, there's a lurking concern that Netflix shares might have already factored in much of the expected good news. This precarious position could leave the stock vulnerable if the upcoming results fail to meet the heightened expectations.
Hanna Howard, a portfolio manager at Gabelli Funds, points to potential risks such as aggressive revenue projections and escalating content costs, especially with optimistic expectations for 2024 and 2025.
Sales Boost and Market Rally in 2023
Netflix's robust 65% stock advance in 2023 is attributed to strategic moves aimed at driving sales. The introduction of a new advertising-supported subscription tier, price hikes, and a crackdown on password sharing were instrumental in a stellar third quarter. The ensuing rally propelled the stock to its most impressive annual performance since 2020.
More Netflix Subscribers to Come
However, not everyone is on board the optimism train. Citi analyst Jason Bazinet, in a recent Bloomberg TV interview, expressed reservations about the high expectations.
"The sell side is expecting all sorts of good things to happen and the buy side is actually on some of the key metrics even ahead of the sell side, so the setup doesn't strike me as particularly favorable," Citi analyst Jason Bazinet said in a Bloomberg TV interview.
Citi downgraded Netflix from buy to neutral, citing concerns about the current setup. Amy Reinhard, Netflix's president of advertising, fueled expectations by revealing a significant surge in ad-tier users. Analyst estimates anticipate Netflix adding 8.9 million subscribers in the upcoming quarter.
The Valuation Conundrum: Cautious Investment Stance
While projections remain positive, some market players adopt a more cautious stance. Gabelli's Howard suggests potential headwinds prompt a conservative approach at current levels.
The market dynamics, where sell-side expectations clash with buy-side metrics, contribute to a less favorable setup, according to Citi's Bazinet.
Looking ahead, the key challenge for Netflix lies in efficiently managing content spending and maintaining a competitive edge over streaming rivals like Disney+ and Max at Warner Bros Discovery Inc.
Wedbush analyst Alicia Reese points to Netflix's profitability and anticipates the company widening the gap by effectively controlling content costs compared to competitors.
In other news, Netflix announced its new partnership with WWE RAW. This means that we are about to see more wrestling-packed episodes on the platform starting in 2025.
Meanwhile, if you want to watch Japanese Netflix, here are the best VPNs you can use to bypass the regional restriction.
