Streaming giant Netflix Inc (NASDAQ: NFLX) is set to report second-quarter financial results after market close July 18. A leading analyst sizes up Netflix's growth story going forward and how the competition stacks up in the streaming sector.
The Netflix Analyst: Goldman Sachs analyst Eric Sheridan has a Neutral rating on Netflix and raises the price target from $600 to $650.
The Analyst Takeaways: Netflix's ad-supported tier could help the company's revenue and operating income growth in the coming years, Sheridan said in a new investor note.
The analyst said Netflix shares have outperformed the S&P 500 since the first-quarter earnings report, after a brief pullback from management commentary of no longer reporting key subscriber figures beginning in fiscal 2025.
Sheridan said Netflix continues to see subscriber momentum with the crackdown on password sharing and can grow revenue per member household.
"Our view remains that converting prior period users into more distinct unit economic tailwinds remains a work in progress for NFLX," Sheridan said.
Going forward, Sheridan sees a mixture of subscriber tailwinds, increased global prices and a strong content slate of returning titles as positives.
"NFLX positively positioned for operating momentum in the coming quarters."
Sheridan sees potential upside to subscriber additions in the second quarter. Sheridan estimates that Netflix will add around seven million net subscribers in the second quarter.
On the ad-tier, the analyst points to a strong proportion of Netflix's subscriber growth coming from this segment and new advertising partners being added.
With 40 million ad-supported monthly active users, Sheridan sees the potential for $3 billion in annual advertising revenue for Netflix.
"We frame a scenario analysis centered around the average ad-supported MAUs that Netflix could potentially scale to by 2025 as well as a range of EBIT margins as the company invests in building out its ad tech stack."
The analyst highlights Netflix launching its in-house advertising technology platform by the end of 2025 as a positive.
One area of concern on the advertising front is Amazon.com (NASDAQ: AMZN) entering the video advertising front. The analyst sees Amazon's large audience size and lower pricing putting pressure on Netflix's CPMs.
On the competition front, the analyst thinks Netflix could see "a normalization of the streaming wars" This thought comes as streaming competitors focus on costs and hitting profitability. Other competitors are also licensing out their original content to help with financials.
Netflix released several hits that saw strong viewership and interest on Google during the quarter, the analyst said. This includes two parts of "Bridgerton" season three, "Baby Reindeer" and "The Upshaws" season five.
"While content slate has been an important driver for user trajectory in the quarter, the critical mass of Netflix's library will likely help smooth out the impact of content slate volatility going forward."
NFLX Price Action: Netflix shares are up 1% to $689.50 on Tuesday versus a 52-week trading range of $344.73 to $697.49. Netflix stock is up 41% year-to-date in 2024.