Netflix earnings are about to hit the Street. Here’s what traders need to know

Published Thu, Apr 18 20241:49 PM EDTUpdated Thu, Apr 18 20241:58 PM EDT

The unofficial start of the first-quarter reporting season for technology giants begins with Netflix after the bell Thursday. Shares of the media behemoth have kicked off the year on a strong note, rallying nearly 26% and outperforming the broader S & P 500. The pressure is on for Netflix following two back-to-back quarterly reports that boosted shares double-digits in the ensuing trading sessions. Last quarter, Netflix fell short of earnings expectations but topped revenue estimates and total memberships. The company also added 13.1 million subscribers , easily topping Wall Street 8 million to 9 million estimate — helped in part by its harsh crackdown on password sharing. NFLX YTD mountain Shares this year For the first quarter, analysts polled by LSEG expect Netflix to report earnings of $4.52 per share on roughly $9.28 billion in revenue. The closely-watched subscriber add figure is expected to come in at 4.59 million, according to Street Account. Wall Street anticipates a largely rosy setup for the stock, with many forecasting that the company beats, or reports in line with expectations. The anticipation contributed to some Wall Street firms lifting their price targets heading into the print. This month, Morgan Stanley analyst Benjamin Swinburne retained his overweight rating and hiked his price target to $700 a share, implying 14% upside from Wednesday's close. JPMorgan's Doug Anmuth lifted his price target to $650 a share, citing ongoing subscriber growth from paid sharing. "Netflix's track record includes pivoting from DVD to streaming, scaling the world's largest studio, and successfully monetizing password sharing," wrote Morgan Stanley's Swinburne. "This track record, combined with new call options (ads, games, live sports) and a 25%+ EPS [compound annual growth rate], supports a premium multiple," and justifies a continued overweight rating. To be sure, some analysts with neutral ratings on the stock have also increase their price targets in recent weeks to account for the stock runup, and some earnings and free cash flow adjustments. Piper Sandler lifted its target to $600 a share, while both Deutsche Bank and Barclays moved to a $550 target from $525 and $475, respectively. Ongoing paid sharing tailwinds? Outside of the top and bottom line figures, Wall Street's keeping a close watch on paid sharing, otherwise known as the company's recent crackdown on password sharing. While no specific metric tracks paid sharing, benefits typically show up in subscriber numbers. In fact, the clampdown helped boost subscriber numbers well above expectations in the past two quarters, contributing to strong additions in the third and fourth quarters of 2024. Analysts expect these tailwinds to ease at some point this year, but the crackdown should continue boosting the company's revenues and subscriber numbers at least in the first quarter. To reflect that, several Wall Street analysts recently lifted their subscriber addition numbers. Along with a price hike, JPMorgan's Anmuth raised the bank's estimate to 6 million from 4.5 million this month, citing paid sharing, alongside a strong content slate and the build out of Netflix's advertising tier. Under the paid sharing plan , Netflix account owners can buy an extra member slot and invite people outside their household to use the service. "While the lowest hanging fruit was captured in 2023, we believe Netflix still has meaningful Paid Sharing monetization opportunity as it tightens filters across specific use cases & borrower cohorts," Anmuth wrote. Also in April, Goldman Sachs analyst Eric Sheridan lifted the firm's estimate for net adds for the first quarter to 7.2 million from 6.6 million, while Deutsche Bank analyst Bryan Kraft upped his estimate by 1.5 million to 7 million. Kraft estimates that Netflix has added about 20 million new accounts, or about 25 million households, through this initiative. But that growth will begin to fade at some point this year. "After 1Q24, Netflix begins to lap the paid sharing benefits - most significantly in 2H24," wrote Morgan Stanley's Swinburne. "This is when we estimate net adds decline YoY." Reason for caution Despite Netflix's strong run this year and the benefits reaped through paid sharing, some Wall Street analysts see reasons for caution. Barclays analyst Kannan Venkateshwar retained his equal weight rating on the stock despite its recent strong performance and subscriber numbers, noting that much of the company's growth potential appears priced in and while long-term margin expectations may be too high. Deutsche Bank's Kraft also expressed some caution on the 450% increase in Netflix's share price over the last 18 months, saying that it creates a "tricky set up" heading into the print. "We believe that in order for the stock to appreciate further, consensus estimates for 2024-2025 will need to be revised higher, as we believe a lot is already priced in at these valuation levels," he wrote, adding that paid sharing should "normalize" at some point this year. Piper Sandler's Matt Farrell said that he's bracing for a pullback to "get more constructive" given the recent run in the stock and heightened expectations. Investors may also be getting overexcited about the company's paid sharing initiative, with MoffettNathanson's Michael Nathanson retaining his neutral rating despite hiking the firm's subscriber estimates. "That said, we continue to remain cautious of pie-in-the- sky forecasts that see this hockey stick continuing indefinitely– the password-sharing crackdown was likely a pull-forward of growth and does not change the underlying fact that there are increasingly fewer and fewer households in UCAN yet to subscribe to the streamer," he wrote. What else to watch Along with paid sharing, Wall Street's also keeping close watch on comments surrounding Netflix' ad-supported tier, which boasted 23 million users earlier this year . Farrell said in an April note that he's keeping an eye on the ramp up of the company's advertising business and on the lookout for signs of a "advertising inflection." "We continue to wait for the pivot to 'walking' from 'crawling', but as the ad-tier competitive landscape intensifies, we suspect scale needs to happen sooner rather than later," adding that the scope of the ad-tier seems to be "lagging expectations." Wall Street will also be monitoring any comments related to Netflix's partnership with WWE , with Citi's Jason Bazinet noting that the company could potentially acquire NBA rights at some point in other regions. "Following Netflix's WWE rights and the pending NBA rights, we believe investors will be listening for any change in tone regarding the company's sports strategy," he said.