Yahoo Finance Netflix is 'doing everything from a position of strength now,' analyst says
Netflix (NFLX) is showing signs of a comeback, at least according to one bullish analyst.
"I think it's back to growth," Santosh Rao, Manhattan Venture Partners head of research, told Yahoo Finance Live (video above). "It's doing everything from a position of strength now because the big concern was: Are they rushing into this ad tier model from a position of weakness? Is their whole business model not working?"
The company's third-quarter earnings report showed a beat on both the top and bottom lines in addition to 2.41 million subscribers.
According to Rao, "this shows that everything's working. They're just layering on another layer of a revenue source ... Everything seems to be on track, doing well. I think Netflix is back in the saddle, so to speak."
Reasons for hope
Tuesday's earnings marked the first time this year the company has added subscribers, which mostly came from outside of the United States.
In the first and second quarters, Netflix lost 200,000 and 970,000 subscribers, respectively. The company said it will stop giving guidance on paid memberships moving forward due to its introduction of new revenue streams. For now, though, it estimated an addition of 4.5 million subscribers next quarter (above prior forecasts of 3.9 million.)
"There are some unknowns," Rao noted when asked about the company's decision to no longer provide guidance.
In particular, he added, "we don't know how many people will get the ad tier ... there's going to be a lot of movement within their subscriber base. We don't know where the chips are going to fall. We think it's just going to be incrementally positive, adding on this ad tier, and it's going to be a good backstop for people who want to leave the platform."
Similar to Rao, most analysts have remained bullish on the profitability aspects of the new ad tier.
UBS Analyst John Hodulik recently upped his price target on the stock by $52 to $250 a share, while JPMorgan Analyst Doug Anmuth said that the ad tier's lower price point ($6.99 in the U.S.) indicates Netflix's confidence in advertising revenue.
Elsewhere on Wall Street, Citigroup Analyst Jason Bazinet (who maintains a Buy rating on the stock) said that the upcoming ad tier "could point to material upside" in free cash flow, and Evercore ISI's Mark Mahaney predicted that ad-supported will bring in $1 to $2 billion in incremental revenue by 2024.
On a call prior to the ad tier announcement, Netflix Worldwide Advertising President Jeremi Gorman said the platform "nearly sold out all of its [ad] inventory" globally for launch — bucking the trend of a global ad spend slowdown.
"There's an ad spend slowdown in your typical models, but this is all net new for Netflix," Jon Christian, EVP of digital media supply chain at Qvest, the largest media and entertainment-focused consulting company, told Yahoo Finance.
Advertising "brings in a new tier of users that potentially wouldn't have even subscribed before," he added, "and there could be a lot of revenue in this game."
FX headwinds
Despite the earnings beat, Netflix lowered its forward guidance, citing foreign exchange (FX) headwinds as the U.S. dollar continues to strengthen against most major currencies.
"Based on our YTD actuals and Q4 guidance, we estimate that this appreciation since January 1, 2022 will negatively impact our full year 2022 revenue and operating income by ~$1 billion and $0.8 billion, respectively," the company stated in its earnings release.
According to Rao, this could be an impediment to Netflix launching its comeback.
"International growth is a key aspect of its whole growth story," he said, adding: "International is where the growth is. And the FX impact is going to be huge. And if there is a slight miss on the 4Q number, it's probably because of the FX impact and a few other things. I think probably they want to be conservative in terms of projecting their 4Q estimates, 4Q guidance. But overall, I think the strong dollar is a big negative."
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Alexandra is a Senior Media and Entertainment Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com
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