Netflix Watchers Mixed In Analysis – Reporting Metrics Set To Change In 2025

In what has come as a surprising turn of events for the streaming giant, Netflix has taken a couple of downgrades from market analysts following its Q1 2024 earnings report. Despite posting robust first-quarter results, with sales soaring to $9.37 billion and a notable addition of 9 million new paid users, the company's stock has lost favour among some analysts over their future guidance and a shift in reporting.

With the share price (NASDAQ: NFLX) falling 9.09% on Friday despite the Q1 beat we need to take a greater look at some of the commentary from both sides of divide. For a stock which had almost doubled year on year before the earnings call (generally regarded as a superb increase), why are some analysts looking to take a backseat?

The Q1 performance certainly demonstrated Netflix's prowess, with an impressive operating margin of 28.1% and earnings per share (EPS) at $5.28—surpassing Wall Street's estimates. This level of achievement reflects the platform's continued ability to drive subscriber growth and scale operations effectively—a storyline that has been central to the company's narrative.

Looking ahead, Netflix provided guidance for Q2 2024, forecasting revenues of approximately $9.5 billion. Even with these figures, however, the euphoric ascent of Netflix's shares—up nearly 200% since July 2022—appears to have hit a ceiling, according to some market participants. This is where the concerns seem to stem from. Guidance from the call is for a reduced EPS QoQ, ($4.68 from $5.28) as the company “expect paid net additions to be lower in Q2'24 vs. Q1'24 due to typical seasonality.”

Concerns have also emerged over Netflix's decision to halt reporting quarterly membership and Average Revenue per Member (ARM) figures starting from Q1 2025.

This disclosure strategy has raised eyebrows and worried stakeholders about the company's transparency. Citi are one of those to emphasise the fact that reduced disclosures may concern the street. With the streaming titan choosing to pivot its focus towards revenue and operating margin as its primary financial yardsticks, analysts are cautious that this could lead to investors demanding a higher risk premium. The change in reporting was explained by Netflix

“As we've noted in previous letters, we're focused on revenue and operating margin as our primary financial metrics – and engagement (i.e. time spent) as our best proxy for customer satisfaction. In our early days, when we had little revenue or profit, membership growth was a strong indicator of our future potential. But now we're generating very substantial profit and free cash flow (FCF). We are also developing new revenue streams like advertising and our extra member feature, so memberships are just one component of our growth. In addition, as we've evolved our pricing and plans from a single to multiple tiers with different price points depending on the country, each incremental paid membership has a very different business impact. It's why we stopped providing quarterly paid membership guidance in 2023 and, starting next year with our Q1'25 earnings, we will stop reporting quarterly membership numbers and ARM. We'll continue to provide a breakout of revenue by region each quarter and the F/X impact to complement our financials. For guidance, we'll add annual revenue guidance on top of what we already provide today: our annual operating margin and free cash flow forecast and forecasts for quarterly revenue, operating income, net income, and EPS. We'll also announce major subscriber milestones as we cross them.”

In a shifting landscape as far as analyst views, we cover the main shifts post earnings.

Analyst Upgrades

• Needham & co has a price target of $700 for Netflix, and has changed the rating of the share from Hold to Buy. Needham believes that its price increases and ad revenue should accelerate revenue growth and expand profit margins for the streaming giant.

• Evercore ISI's price target for Netflix has been raised from $640 to $650. Mark Mahaney, Evercore's analyst, has kept an Outperform rating on the shares following what the firm describes as “Beat & Bracket” Q1 EPS results. Following the Netflix's Q1 report, the firm's FY24 and FY25 revenue estimates remain unchanged, but its operating income and EPS estimates have risen 3% and 5%, respectively, it is also raising its subscriber addition estimates.

• BofA have kept a Buy rating on Netflix's stock and also raised the firm's price target to $700 from $650 after the company reported “strong” Q1 results, including net sales of 9.3M. Netflix still has several growth drivers, including an accelerating ramp of its swelling ad business; continued, albeit moderating, benefit from password sharing; a strong 2024 content slate; still significant subscriber runway in developing markets; and pricing, the analyst tells investors.

• Wells Fargo raised the firm's price target on Netflix to $726 from $650 and keeps an Overweight rating on the shares following last night's Q1 report. The analyst thinks Netflix has significant operating leverage and margin discretion, underpinned by strong revenue growth. The firm says double digit annual average revenue growth plus margin expansion and share buybacks equals 30% annual earnings growth through 2028. Wells struggles to think of another industry with a market leader that has such high share and strong returns. It believes estimate revisions and advertising share gains are the catalysts for the stock.

Analyst Downgrades

• On the other hand, Canaccord have gone against the grain and downgraded Netflix to Hold from Buy with a price target of $585, down from $720, which is a sizeable drop. Netflix Q1 results that were ahead of expectations, with revenue shooting up from member subscription additions as the company continues to scale its “paid sharing offering” the analyst tells investors in a research note. Despite these “mostly solid results and outlook,” the firm sees limited growth catalysts for the next few quarters and with the stock up 90% over the last 12 months, it thinks investors “may be well served to look elsewhere for upside.” Netflix's paid sharing likely meaningfully pulled forward member growth and reduced subscriber disclosures add to the uncertainty, contends Canaccord.
• Rosenblatt also reduce their price target from $554 to $540, but remains ‘Neutral'. The firm feels that subscriber growth may have peaked, and enter a deceleration phase as the company “looks like a transition into a more mature phase”.

As the streaming arena becomes increasingly competitive and content costs rise, Netflix's meteoric growth phase could be starting to level off. With this change in reporting, market watchers will be keenly observing whether Netflix can continue to exceed expectations, and it is hard to say either way. There have been significant shifts in sentiment for the streamer in the past, but this was largely a very positive earnings. The bears are certainly louder than they were before the call, but it will likely take more than one negative outlook note to shift the bulls on this one.