streaming giant Netflix Inc NFLX reported quarterly results This week, the company beat Street’s estimates. An analyst shared 10 surprises from the earnings report.
The Netflix Analyst: Needham analyst Laura Martin has a hold rating on Netflix and no target price.
The Analyst Takeaways: Martin shared 10 surprises from Netflix’s third-quarter earnings report, which are as follows:
1. Netflix’s ad-supported plan has no targeting at launch.
“Header bidding was invented 7 years ago. Why is Netflix’s ad tier using ad orders where almost no targeting is available at launch?” said Martin.
2. Netflix stops leading by subscriber numbers after the fourth quarter.
“What surprised us the most was that NFLX said it would stop running sub-adds after this quarter. We’re assuming NFLX has said it will stop carrying sub-adds after this quarter. We’re assuming Netflix isn’t doing this to harm itself, which means its new ad-driven tier and crackdown on password sharing still won’t be enough to reverse subs’ disapproval in 2023 .
3. Netflix’s ad-supported plan is a product that Netflix will improve over time, Martin said.
“This strategy surprises us because this Silicon Valley ‘move fast and destroy’ strategy is typically used with consumers who pay nothing and have no power.”
Martin sees downside risk with this strategy if something goes wrong.
4. Netflix believes the $7 per month pricing tier will attract new subscribers and keep existing users from going down.
“Third-party surveys do not support this view. Studies point to cannibalization of higher-priced tiers, which would pose a headwind for NFLX revenue growth.”
5. Advertising is meant to be margin-enhancing “over time,” Martin said.
“This surprises us, given that ads typically have 70% to 80% incremental margins and Microsoft is Netflix’s tech stack. This implies that Netflix is adding the costs associated with the ad tier and ROIC assumptions for its ad tier are too high in the short term.”
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