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Although Netflix boasts 207 million global subscribers, the company is still viewed by Wall Street as a disrupter.
Better-than-expected sub growth has made investors swoon for the stock; shortfalls have chilled it. Yet, as analysts expect Netflix to miss sub expectations again when it reports its latest results July 20, another indicator for the streaming giant is emerging.
Earnings and average revenue per user, helped by price increases, are becoming more important to Netflix’s performance, argues Wells Fargo analyst Steven Cahall. In the U.S., Netflix plans range from $9 to $18 a month. Even if sub gains hold steady in the 20 million to 25 million per year range, “the math makes annual net adds a decelerating percentage on the growing base” of its revenue, Cahall explained in a June 23 report.
Cahall’s forecast, titled “The World According to GARP,” which stands for “growth at a reasonable price,” argues that the streamer is going through a similar change as Google parent Alphabet and Facebook before it: “The past year has turned Netflix from more of a subscriber net add story to something more predictable and suitable for GARP investors.”
KeyBanc analyst Justin Patterson echoed Cahall’s point in a report saying that Netflix sub growth “softness does not materially weigh on financials” and noting that “each 1 million variance in net adds only amounts to a less than 1 percent change to the revenue base,” limiting financial downside risk.
Patterson, in a June 16 report, argued that data suggests “Netflix is tracking below our/Street” estimates of 800,000/1 million due to “a lighter content slate and more time spent outdoors.” He warned that “this dynamic could lead to soft net add guidance for the third quarter,” but suggested that thanks to new episodes of original series there was “light at the end of the tunnel with the return of Money Heist (third and fourth quarters) and The Witcher.”
However, some on the Street are bearish on the Reed Hastings-led Netflix before its midyear update. In a June 22 report, Benchmark analyst Matthew Harrigan, who has a “sell” rating on the stock, noted its sell-off this year.
Harrigan warned the streamer might be losing its status as a disruptive growth firm: “The market may be starting to reprice Netflix as largely a media name than a category-killer tech company, with Netflix off (7.4 percent) year-to-date versus a 9.0 percent Nasdaq 100 return.”
This story appeared in the June 30 issue of The Hollywood Reporter magazine. Click here to subscribe.
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