As evident by recent quarters’ performance, the new subscriber additions to Netflix (NFLX) have shown to be slowing down. In fact, Morgan Stanley’s Benjamin Swinburne notes the expectation is that Netflix will “no longer grow at the ~25 million annual average seen in the pre-pandemic years (’16-’19).”
The analyst thinks there are “three drivers of a more modest growth trajectory.”
For one, the “under-penetrated” regions of EMEA and APAC have historically been marked by having lower pay-TV penetration and ARPUs and are where local programming has been more prominent. Therefore, Swinburne expects them to grow at a slower pace than the “peak growth” delivered by the UCAN/LATAM/W. Europe regions in between 2016-2019.
The next reason offers a turning of the tables. As Netflix “scaled” its business and ushered in the era of cord-cutting, many legacy TV companies bemoaned the capital markets’ eagerness to finance Netflix’s “billions in cash burn.”
“The roles are ironically now reversed,” the analyst explained, “as incumbent media companies (as well as several mega tech platforms) are willing to lose billions building their own streaming services.” Furthermore, compared to Netflix, these services are “often priced at deep discounts.”
Lastly, while Swinburne thinks the company’s move into gaming is an “engagement TAM expander” which is logical and could turn out to be very successful, by opting out of live sports, Netflix has reduced its TAM somewhat. “The returns in live sports may be unattractive,” says the analyst, “but consumers watch and importantly pay for exclusive live sports around the world, and Netflix – now in ⅓ of global broadband HH (ex China) – is not in this business.”
That’s not to say all is lost. In fact, over the long-term Swinburne expects the streaming giant to generate “compelling revenue and margin growth.”
However, closer to the here and now, while the valuation in by no means “stretched,” the fact expectations have been lowered on the net adds front, it is unlikely shares can “outperform with falling net adds estimates.”
Accordingly, Swinburne rates NFLX shares an Equal-weight (i.e. Hold) along with a $425 price target. Nevertheless, there’s still upside of ~26% from current levels. (To watch Swinburne’s track record, click here)
14 other analysts join Swinburne on the sidelines and with another 17 Buy ratings and 2 Sells, NFLX stock has a Moderate Buy consensus rating. The average price target is more upbeat than Swinburne’s, and at $498, could yield returns of ~47% over the next 12 months. (See Netflix stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
