Citigroup analyst Jason Bazinet cut his rating on Netflix to neutral from buy, while keeping his $500 price target in place, as higher content-spending plans and muted revenue-growth prospects could squeeze profit margins.
“On almost every metric, [Wall] Street expects robust results over the next two years,” Bazinet said in a note to clients, citing “accelerating revenue growth, [earnings before interest and taxes]-margin expansion to new highs, muted increases in content spending, robust free-cash flow and large share repurchases.”
“In short, we believe expectations are high,” he added
Ample cash on hand, which may top $8 billion by the end of next year, could give Netflix the firepower it needs to fund new deals, however, with “the most likely target a videogame publisher with a robust portfolio of [intellectual property].”
Netflix shares were marked 2.03% lower in premarket trading to indicate an opening bell price of $475.16 each, a move that would trim the stock’s six-month gain to around 8%.
Price hikes support profit focus
Late last year, Netflix said it would lift prices for its subscriptions in key markets, including the U.S., the U.K. and Canada, with the aim of offering a lower entry point for new subscribers as it ramped up the surcharge for households sharing passwords.
The price hike reflected Netflix’s confidence in building on its 246 million global subscriber base, after adding 8.76 million new customers over the quarter. That gain, the strongest of the year, smashed Wall Street forecasts even amid a dearth of new original programing owing to the Screen Actors’ Guild strike.
Netflix also suggested it could add a similar amount over the final three months of 2023, while lifting its free-cash flow guidance.
The pricing changes are likely to offset some of the concern investors took from comments made by Chief Executive Greg Peters at a Goldman Sachs media conference in September, when he appeared to prioritize market-share growth over profitability.
“Our primary financial metrics are revenue for growth and operating margin for profitability. Our goal is to accelerate revenue growth, expand operating margin and deliver growing free cash flow,” Netflix said in its shareholder letter. “Nine months through the year, we are well positioned to meet these objectives in 2023.”
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