Investors Should Be Ready for Netflix's New Reality Even Though Netflix's Stock is Rising

Netflix Inc. shares surged buoyed by optimism surrounding its third-quarter subscriber growth, which exceeded expectations. Although Netflix reported several positives in its latest earnings, Barton Crockett, an analyst at Rosenblatt Securities, pointed out that the stronger-than-expected paid net additions were the key growth driver in the report. However, this metric will soon disappear, as Netflix plans to stop reporting paid net additions on a regular basis beginning with its first-quarter earnings next year. The decision is part of Netflix’s strategy to shift investor focus toward its financial performance, potentially preparing the market for slower subscriber growth in the future, a move some analysts had anticipated.

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Crockett highlighted that Friday’s investor excitement stemmed from a metric that won’t be disclosed beyond 2024. Despite Netflix surpassing its own revenue projections for the third quarter, Crockett found the company’s guidance for next year to be somewhat underwhelming. He noted that Netflix expects revenue growth of 11% to 13% in 2025, driven by both subscriber growth (which will no longer be reported) and average revenue per member. While this guidance is in line with consensus estimates, it suggests that subscriber additions will slow down in 2025 compared to 2024.

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Crockett maintained a neutral rating on Netflix but raised his price target from $635 to $680, signaling cautious optimism. Despite these mixed signals, Netflix shares jumped nearly 10% in morning trading.

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Meanwhile, Matt Farrell, an analyst at Piper Sandler, took a more favorable view of Netflix’s outlook. Farrell believes that subscriber growth will continue to be the primary driver of Netflix’s revenue expansion. He also noted that Netflix met consensus expectations without announcing a significant price increase for its U.S. and Canadian markets, which many had anticipated would accompany the third-quarter results. Farrell remarked that since Netflix didn’t raise prices, this remains a potential catalyst for the stock in the future. He reiterated his overweight rating and raised his price target from $800 to $840.

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Analysts across the board saw a bright future for Netflix, with some focusing on the company's progress in its advertising tier. In countries where Netflix offers the ad-supported plan, over half of the third-quarter signups opted for that tier. This growing preference for the ad tier is seen as a promising development for the company. According to Wedbush analyst Alicia Reese, the ad tier’s most significant advantage is its ability to reduce subscriber churn, thereby easing the pressure to continuously attract new subscribers. Reese predicted that Netflix would ramp up its ad-tier revenue contribution over the next few years by enhancing its advertising solutions, leveraging new partnerships, and adding more live events.

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While Netflix doesn’t expect the ad tier to be its primary growth engine in 2025, Reese anticipates that this dynamic will shift by 2026. She pointed to several upcoming live events, including NFL games and WWE events, as well as an expansion into more licensed intellectual property in gaming, which could bolster the ad-tier’s significance in the long term. Reese expressed confidence in Netflix’s ability to deliver stable results amid an otherwise volatile tech environment. She maintained her outperform rating on Netflix and raised her target price from $775 to $800.

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Jeff Wlodarczak, an analyst at Pivotal Research, echoed these positive sentiments. He emphasized Netflix’s ability to scale and continue generating strong subscriber growth and free cash flow. This financial stability, combined with the company’s capacity to reinvest in its growth, positions Netflix as a formidable player in the streaming landscape. Wlodarczak, who already held the highest price target among sell-side analysts, raised his target even further, from $900 to $925, following Netflix’s earnings report. He also reaffirmed his buy rating on the stock.

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The upbeat outlooks from various analysts reflect confidence in Netflix’s strategy and long-term growth prospects, despite the upcoming changes to how it reports subscriber metrics. While some, like Crockett, remain cautious about the company’s future subscriber additions, others, like Farrell and Reese, see opportunities for Netflix to continue expanding its revenue streams through advertising, live events, and gaming.

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The absence of a U.S. and Canada price hike in the latest quarter may have surprised some investors, but it leaves room for Netflix to implement such increases later in the year, which could further support its financial performance. As Netflix broadens its revenue base through its ad-supported tier and ventures into new areas, such as live sports and gaming, analysts believe it is well-positioned to navigate the evolving streaming market.

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Despite the mixed perspectives on subscriber growth in 2025, Netflix’s strong third-quarter results and robust free cash flow give it the flexibility to invest in future growth initiatives. As the company continues to evolve its business model, shifting focus from pure subscriber growth to a more diversified revenue mix, Netflix remains a key player in the competitive streaming landscape, with the potential to capitalize on new opportunities in advertising, live content, and beyond.

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In summary, Netflix’s latest earnings report has sparked optimism among investors and analysts alike, with many highlighting the company’s subscriber growth, advertising potential, and ability to scale. Although the company faces some challenges in terms of subscriber reporting and future growth, its strong financial foundation and strategic initiatives position it for continued success.

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