Netflix stock fell 10% Friday, with many Wall Street analysts raising questions about the company’s strategic direction.
The company’s first-quarter results, released after the close of Thursday trading, beat expectations for revenue and earnings, but its financial guidance for the second quarter undershot analysts’ forecasts. That shortfall and the news that co-founder and longtime ex-CEO Reed Hastings is leaving the board of directors and ending his three-decade association with the company he co-founded, sent shares down after hours Thursday.
The slide continued Friday despite gains in the broader market, with trading volume in Netflix shares at nearly twice normal levels, and shares hovering at around $97 in the session’s final hour. The tumble reversed momentum that had pushed the stock up more than 15% for the year heading into earnings. Many analysts noting the stock’s run-up due to news in March of price increases and a general sense of relief that the company wouldn’t be encumbered by a massive acquisition of traditional assets. After offering $82.7 billion for Warner Bros. Discovery’s studios-and-streaming business, Netflix bowed out in February and WBD accepted a richer bid from Paramount for the entire company.
“Any stock that runs 40% into an earnings print better be an absolutely perfect print,” Eric Clark, portfolio manager of LOGO ETF said via email. “But we don’t care, short term noise in a quarter has never bothered us.” He remains upbeat about Netflix because of its move into sports (“a very big win for them”), investments in AI and generally superior business model.
Many other Wall Streeters were more circumspect. Jessica Reif Ehrlich of BofA Securities continues to rate Netflix shares a buy, but said the quarter and execs’ comments on their quarterly earnings interview were not persuasive. “While we remain believers in the longer-term business prospects, in the first quarter following its decision to walk away from the Warner Bros acquisition, we would have expected a clearer and more compelling articulation of management’s near‑ to medium‑term outlook.” she wrote in a research note.
Analysts didn’t mind the decision to drop out of the Warner deal. Instead, they pointed to what they see as broader signs of slowing growth that may have compelled Netflix (despite their insistence to the contrary) to take a big M&A swing. “And now, back to regularly scheduled programming,” quipped New Street Research’s Dan Salmon.
Jeffrey Wlodarczak of Pivotal Research Group, maintains a “hold” rating on the company’s shares due to issues he has with the larger trends in media and entertainment.
“We remain concerned that short form entertainment (such as TikTok, Instagram, X, YouTube shorts and Snap) is doing to streaming what streaming has done to traditional TV as (especially younger) consumers spend an ever increasing time on these social media platforms amidst plummeting attention spans (which is fundamentally negative for long form content),” he wrote. FAST channels are another threat given the financial challenges faced by lower-income households, he added.
Assuming Paramount’s hefty WBD purchase closes on schedule by September, Wlodarczak said the combined company will be a “much more powerful global competitor” with Netflix.
Anticipating that future growth will be driven by price increases and advertising, rather than the subscription growth that has defined Netflix for most of its existence, the analyst declared company’s story to be “lacking excitement relative to a rich valuation.”
Laurent Yoon of Bernstein Research said he is “closely monitoring” the company’s efforts to restore margins and avoid having to increase spending on programming, which would squeeze profits. But unlike Wlodarczak and other bears who cite broader competition, Yoon says the company is showing signs of evolution. “We are encouraged by Netflix’s investments in the mobile experience and vertical format content,” he wrote in a client note. “While not sufficient on their own, these initiatives represent constructive steps toward innovation aligned with shifting consumption behavior.”
