Netflix should be able to crush it right now, after reporting record quarterly revenue, rising subscriber numbers and a solid outlook for further growth that has prompted analysts to raise their earnings estimates.
But the stock is set to sell off Friday after the world’s most valuable entertainment company shocked the market with news that it will soon stop updating investors every quarter on how many customers subscribe to the streaming giant.
“Ultimately we believe this is a better approach that reflects the evolution of the business,” co-CEO Greg Peters said Thursday, adding that the decision is “consistent with how we manage engagement, revenue and profits internally ”.
Investors fear it may be linked to last year’s crackdown on password sharing, which, along with the push for a new ad-supported subscriber tier, has driven its notable growth of late.
Given that the initiative began to impact results in the second half of 2023, this means that year-over-year comparisons will soon shift from tailwinds to tailwinds. Most of the low-hanging fruit has already been harvested, leaving only a few quarters of ever-diminishing returns.
It’s possible that Netflix expects U.S. subscriptions to start declining next year, something it first saw in 2019, before the pandemic boosted demand. Markets did not digest the news well at the time and shares are now set to open 5% lower when trading begins later today.
“What is really scaring the streets right now,” said Geetha Ranganathan, senior media analyst at Bloomberg Intelligence Yahoo Finance“is that they’re going to stop issuing any kind of subscriber metrics starting in the first quarter of 2025, and I think people generally look at that as sort of stabilizing growth.”
Netflix is only testing the waters in live sports
The industry is currently going through a period of crisis as both linear and digital TV have their specific problems. Paramount is trying to sell itself as Disney weighs what assets it should offload to finance its loss-making streaming service and, with it, possibly earn double-digit margins in the future.
However, Netflix has already reached the promised land some time ago. Based on subscriber numbers that beat Street estimates by about 5 million and an operating margin target of 25% for 2024, Deutsche Bank raised its estimates for revenue, operating profit and free cash flow, and with it the stock’s price target at $575. , up from the previous $550.
Looking ahead, however, investors are wondering what will drive earnings growth once the effects of the crackdown on password sharing and the expansion of ad-supported subscriptions begin to wear off.
One solution has been to focus on live sports, an area long dominated by Disney’s ESPN and which has a built-in audience that is very attractive to advertisers.
With the help of its wealthy parent company Amazon, Prime Video struck first in 2021, inking a deal to show the NFL Thursday night for $1 billion a year.
By comparison, Netflix has just begun tiptoeing in to test the waters, signing a deal to show Mike Tyson’s bout with Jake Paul and to bring wrestling matches from WWE Raw to the platform next year.
However, investor Deepwater Asset Management has argued that this will not be enough and warned that the kind of heavy spending they will need to secure streaming rights will almost certainly dilute their profitability.
“If it’s these one-off sporting events, or eclectic sporting events like wrestling, NASCAR, things like that, I don’t think they’re going to move the needle,” said Gene Munster, the firm’s managing partner. CNBC. “They have to get into some traditional sports and that will impact margins.”