Netflix Inc., the streaming giant that has enjoyed a meteoric rise in stock value since its May 2022 low, now faces a turning point as Wall Street questions whether the company's best days of growth are behind it. Shares of Netflix have surged nearly 340% from their lows, driven largely by strategic moves such as cracking down on password sharing and introducing an ad-supported subscription tier. However, as the company prepares to release its third-quarter earnings, analysts are increasingly cautious about the sustainability of this momentum.
Barclays analyst Kannan Venkateshwar recently downgraded Netflix's stock to underweight, citing concerns that the company's key growth drivers, such as its paid sharing model, may have front-loaded future revenue gains. "Netflix has had a period of exceptional execution," Venkateshwar wrote, "but it had to lean heavily on new growth mechanisms to maintain double-digit revenue growth." He added that expectations for continued growth are now overly optimistic.
Market sentiment reflects this skepticism. Netflix's stock is trading just 3% below the average analyst price target, indicating limited room for upside in the next 12 months, according to data compiled by Bloomberg. This places Netflix in the bottom 20 stocks in the Nasdaq 100 Index for implied returns. The company is expected to report a 14% revenue growth for the third quarter, a figure that analysts expect to gradually decline in the coming periods, falling from a peak of 17% in the prior quarter.
Amid this backdrop, investors are questioning the valuation of Netflix's stock, which trades at 32 times forward earnings. This is significantly higher than the Nasdaq's average of 26 times and far above rivals like Walt Disney Co., which trades at 19 times, and Paramount, at just 7 times. "The stock is very expensive," commented Matthew Maley, chief market strategist at Miller Tabak + Co. LLC. "Netflix will have to improve the earnings part of its price-to-earnings ratio if it hopes to sustain its rally."
The company has options to drive growth, with price increases being the most prominent. However, raising prices could alienate customers in a market where consumers are increasingly cutting back on non-essential spending, such as streaming services and other discretionary items. "Netflix still has a loyal subscriber base," said Thomas Martin, senior portfolio manager at Globalt Investments, in an interview. "They have a lot of room to raise prices without losing customers."
Nevertheless, some analysts warn that price hikes are not a sustainable long-term strategy. Citi analyst Jason Bazinet suggested that any price increase could provide a short-term boost to the stock but warned that this effect might fade as revenue growth and earnings estimates for 2025 are revised downward. "We would expect shares to eventually trade lower as investor hopes for $25 EPS in 2025 are dashed," Bazinet said.
Evercore ISI analyst Mark Mahaney has also speculated that a price increase could be announced within the next three to nine months, citing a pattern of annual hikes by Netflix. "It's not a bold prediction; we're due, and we know it," Mahaney wrote in a note to clients. While a Netflix spokesperson declined to comment, market watchers are already bracing for the possibility of higher bills.
Some analysts believe that Netflix may choose to raise prices selectively, sparing its ad-supported tier to maintain competitiveness in the market. The ad-supported plan, priced at $6.99 per month, was left unchanged during the last price adjustment-a move that Wedbush analyst Alicia Reese described as a "surgical" strategy aimed at attracting cost-conscious consumers. Reese predicts that Netflix will continue this approach, allowing it to gradually shift more users onto the ad-supported model without alienating its core customer base.
For Netflix, the transition to ad-supported revenue is increasingly crucial. The company's crackdown on password sharing provided a temporary boost, but analysts like Reese argue that its advertising tier will become the primary growth engine by 2026. "If Netflix wants to see its stock near $800, it needs to develop a significant new revenue stream," she wrote.
Investors and analysts are also paying close attention to Netflix's Q3 earnings report, scheduled for release at 4 p.m. ET, followed by a Q&A session with senior management. The report is expected to provide insight into the company's growth prospects and any potential plans for price increases. Rich Greenfield of LightShed Partners has already prepared a list of pointed questions for co-CEOs Ted Sarandos and Greg Peters, with his first query focused on whether a 2024 price hike is in the works.
As Netflix navigates these challenges, it faces increasing competition in the streaming market, with rivals like Disney+, Max, and Hulu all adopting similar strategies of raising prices. Analysts suggest that the landscape for streaming services has shifted from a premium-based model to one where Netflix is positioned as a "value" option. "Netflix's strategy has evolved significantly," Jefferies analyst James Heaney noted. "It is no longer the premium product it once marketed itself as but instead offers value relative to its competitors."
