Netflix is Doing the Impossible, Which May Be Bad News for Bears

Bernstein analyst Laurent Yoon, though not particularly bullish on Netflix Inc. shares, had commendations following the company’s recent report.

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“What seemed to be an almost impossible number to hit in [2024] is within sight,” Yoon noted, referring to Netflix's (NFLX) impressive trajectory towards 30 million net additions for the year. This marks more than 11% growth from the previous year, despite the company’s “cautious” projection that third-quarter new additions might fall short of the 8.8 million seen in the same quarter last year.

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Yoon and his team were particularly pleased with the net additions in the U.S., suggesting that paid-sharing continues to thrive. Additionally, he highlighted encouraging international trends, noting that non-English content is driving membership growth in markets like France, Korea, and India—a trend he expects to persist.

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“One overarching question we get quite often from [long-only investors] is whether there’s a realistic bear-case for Netflix in the foreseeable future,” Yoon added. With increasing revenue, expanding margins, and a growing content library, he doesn’t foresee one in the near term.

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While maintaining a market-perform rating on the stock, Yoon raised his target price to $625 from $600 following the earnings report.

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Despite a strong subscriber report on Thursday afternoon, Netflix shares have reacted tepidly, falling about 1% premarket. If this decline holds through the close, it would mark the stock’s most muted post-earnings performance in at least five years.

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Evercore ISI’s Mark Mahaney also praised the subscriber growth. The addition of 8 million net new members was “very impressive…and very surprising in what has always been a seasonally soft – and sometimes very soft” quarter for additions.

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Mahaney highlighted robust net additions in Netflix’s mature U.S./Canada market and its burgeoning Asia market. “That should augur very well for future [subscriber] growth,” he noted. While there was “some after-market debate” about third-quarter net additions, Mahaney anticipates around 4 million new subscribers then, before Netflix rebounds with over 8 million in the fourth quarter.

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He rates the stock at outperform and raised his target price to $710 from $700.

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Rosenblatt’s Barton Crockett titled his note to clients, “The Good, and the Questionable.” He acknowledged that Netflix “defied concerns” from his preview with its positive subscriber numbers but also emphasized the need for Netflix to consistently deliver strong subscriber metrics over the next two quarters, until it stops reporting the figure.

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According to Crockett, given Netflix’s projection for flat average revenue per member, the company would need only “modest” subscriber performance in the third quarter to meet its below-consensus overall revenue guidance. He projects 1.6 million new subscribers for this period.

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Since Netflix has historically guided very closely on revenues and average revenue per member, Crockett suggests that the company might not see significant subscriber-growth momentum in the third quarter.

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“It’s crucial that sub growth catapult up in [the fourth quarter], a seasonally strong period, to retain positive sentiment on the stock,” Crockett wrote. He emphasized that Netflix plans to stop reporting subscriber numbers in 2025, and ending on a weak subscriber count could negatively impact investor sentiment.

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Crockett maintains a neutral rating on the stock, with a revised target price of $635, up from $554.

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Overall, analysts are cautiously optimistic about Netflix’s future, acknowledging the company's impressive subscriber growth while remaining mindful of the potential challenges ahead. The strong U.S. performance and growing international markets, particularly with non-English content, are seen as positive indicators. However, the company must sustain its momentum, especially in the traditionally strong fourth quarter, to maintain investor confidence as it transitions away from reporting subscriber numbers in 2025.

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