Netflix earnings need to justify runup in stock. What’s ahead for ad tier

The unofficial start of the third-quarter reporting season for megacap tech stocks kicks off Thursday with results from Netflix . The stakes are high following a rapid year-to-date jump in the media streamer’s shares. Netflix shares have powered to all-time highs in recent weeks, surging 44% in 2024, twice the return on the S & P 500. The move has lifted Netflix’s market value to $310 billion and elevated its price-to-earnings multiple to 40 times this year’s earnings, making new subscriber figures and potential price hikes key focal points for Wall Street beyond the revenue and profit numbers. Analysts surveyed by LSEG expect Netflix earnings to come in at $5.12 per share, while revenue should hit $9.769 billion. In the second quarter, Netflix earned $4.88 per share on $9.56 billion in revenue. Subscriber numbers remain a focus on the Street as tail winds fade from the company’s paid-sharing initiative — a crackdown on password sharing implemented in May 2023 — and Netflix slowly builds its advertising tier. Many analysts also warn that material advertising additions may not hit until 2025. Last quarter, the streamer added 8 million subscribers and said it grew advertising memberships by 34% in the second quarter. This quarter also marks one of the final periods that the company will announce quarterly subscriber figures. Analysts polled by StreetAccount expect 282.15 million subscribers for the quarter, although Evercore ISI’s Mark Mahaney views the consensus estimate as “appropriately conservative.” Along with solid numbers for the quarter just ended, other analysts believe Netflix also has to raise prices to appease shareholders. Citigroup’s Jason Bazinet says price hikes are warranted at Netflix due to strong engagement trends and competitors’ own price increases. Skepticism on Wall Street Despite Netflix’s spectacular run, some analysts warn that investors should exercise caution, at least over the short term. Goldman Sachs analyst Eric Sheridan reiterated the bank’s neutral rating on Netflix in an earnings preview, and his 12-month price target of $705 suggests the stock will be pretty much dead money over the coming year. Deutsche Bank’s Bryan Kraft similarly reiterated his hold rating, citing a heightened valuation that “leaves little opportunity for further multiple expansion,” and which will “likely contract” as benefits from the company’s password sharing crackdown — or paid sharing — fade. Wells Fargo analyst Steven Cahall also believes that next year’s estimates need to move up to support Netflix’s high valuation and warned investors to brace for a “less favorable” near-term backdrop. Together, such concerns have led some analysts to step away from the stock altogether in the short run. This month, Barclays analyst Kannan Venkateshwar downgraded Netflix to underweight, citing expectations for slowing growth and a “complex” mixture of catalysts. “Even if NFLX gets to its revenue goal, valuation implicitly prices in more than a doubling of sub base from present level, which seems unrealistic,” he wrote. Growing optimism Still other analysts have turned more bullish on the shares, lifting their respective price targets ahead of Thursday’s print. Loop Capital’s Alan Gould upped his price target this week to $800 from $750, implying scope for another 14% run for Netflix from Wednesday’s close. While the shares trade at a premium, Netflix’s fundamentals should improve subscriber figures and viewership trends. “NFLX’s dominant position in the streaming business continues to grow,” he wrote, highlighting the company’s promising content slate and upcoming sports programming. “We anticipate further consolidation of the traditional studios and are seeing more [rational] pricing which should lead to a more profitable industry environment.” Piper Sandler’s Matt Farrell also moved to an $800 target this month and lifted his rating to overweight, citing the company’s position as the leading streamer, as well as opportunities to lift prices through its ad-tier business. “Notably, our prior Neutral stance was centered around valuation, but now, we appreciate the company is expensive for a reason,” he wrote. A ramping ad tier Finally, Wall Street is keeping close watch on the advertising tier business Netflix rolled out in November 2022. JPMorgan analyst Doug Anmuth projects that the ad tier could hit 31 million subscribers by the end of 2024 and 42 million by the end of 2025. While the program has weighed on average revenue per subscriber, he believes it will gain traction next year, improve monetization and power high-margin revenue gains. Morgan Stanley analyst Benjamin Swinburne expects advertising revenue will quadruple to $4 billion by 2028 from $1 billion in 2024. While the program is making strides, analysts such as Wells Fargo’s Cahall warn that the initiative should provide little material upside until 2025. “We think Netflix is positioned to accelerate ad tier revenue contribution into year-end and 2025 as it improves its advertising solutions and targeting, utilizes new partnerships, and adds more live events,” wrote Wedbush analyst Alicia Reese. “With this set-up, the ad tier should become the primary growth driver in 2026.” Correction: Loop Capital’s Alan Gould upped his price target this week to $800 from $750, implying scope for another 14% run for Netflix from Wednesday’s close. An earlier version misstated the percentage.