stock fell 10% last week, and one analyst team believes they know what helped trigger the decline.
The suspected catalyst? A trio of comments made by Netflix (ticker: NFLX) at a conference last week that included the following: “1) NFLX intends to grow operating margins ‘more gradually’ than 3% a year going forward; 2) the advertising revenue business is still in the ‘crawl of the crawl, walk, run stage;’ and 3) the Hollywood strikes are ‘bad for business,’” Evercore ISI analysts led by Mark Mahaney wrote in a Sunday report. They maintained their Outperform rating on Netflix stock but lowered estimates and cut their price target to $500 from $550.
Netflix stock is 0.1% higher to $ 397.38 in Monday morning trading, and sports a year-to-date gain of 35%.
Beginning with margins, analysts expect content spending over the next few years to remain mostly flat, which means a gradual uptick in gross margins. That being said, the analysts believe management’s comments on growing operating margins “more gradually” has no structure behind it. It instead is a choice, they argued, speculating that perhaps extra margins will be used for building its own ad-selling infrastructure or to cushion higher content costs.
Pivoting to advertising revenue, there’s enough industry demand for Netflix ad inventory, but not enough supply, the analysts continued. “This is a heckuva better problem to have than the contrary,” they added. “And it is a problem that will be addressed over time, as awareness of and selection of Neflix’s ad-supported offering increases.”
And finally, the strikes, which the analysts argue are challenging for the streaming firm in two ways. “First, they create a potential air pocket in the company’s content slate,” they wrote. “And second, they push off the potential date for a “widening” of Netflix’s price points—i.e. price increases.” They think the company will raise its subscription prices, but believe that to do so, it has to “generate greater value for its subscribers” through strides in content quality and quantity.
Wall Street is mixed on Netflix stock, with 53% of analysts covering the shares have Buy ratings, 40% with Neutral ratings, and 7% Sell ratings, according to FactSet.
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