Netflix (NFLX) stock jumped as much as 16% on Thursday after the streaming giant reported earnings that beat expectations on both the top and bottom lines while subscriber additions surged by nearly 9 million in the quarter.
The company also revealed it will be raising prices in the US, UK, and France — a positive development to some analysts on Wall Street.
"Of all the new data points, we think the biggest surprise is the immediate and substantial price hikes in three of Netflix’s largest revenue markets," MoffettNathanson analyst Michael Nathanson wrote in reaction to the report on Thursday.
Netflix's Basic and Premium plans will now cost $11.99 and $22.99, respectively, in the US. That's up from the prior $9.99 and $19.99 price points. The company's $6.99 ad-supported plan and $15.49 Standard plan will stay the same price.
"By [raising prices], Netflix is further incentivizing new and existing members to sign up for its materially lower priced ad-supported plan while also driving ARM, [or average revenue per membership], among households that are either price inelastic and/or advertising adverse," the analyst continued.
Nathanson, who maintained his Neutral rating and price target of $390 on the stock, raised his fourth quarter and full-year 2024 revenue projections by 2.6% and 3.5%, respectively, citing the price hikes.
He also estimated ARM will jump between 8% and 9% in the three markets impacted by the pricing changes, assuming no major changes in subscriber behavior.
ARM decreased 1% year over year in the third quarter, although Netflix said the pricing changes will help significantly boost the metric in the quarters to come.
"Netflix rolled out a series of upside surprises across a variety of 2023 and 2024 metrics that have the net effect of materially lifting 2023 free cash flow and 2024 EPS," Nathanson said. "This will undoubtedly be the read of the market, which will help stabilize Netflix’s recently turbulent stock price."
Netflix shares, although up more than 30% year to date, are still down 15% over the past three months.
Wells Fargo analyst Steve Cahall said he sees upside to the current valuation — but only if the company can execute.
"Q3 showed negativity is overdone and growth is better than fine," the analyst, who reiterated his Overweight rating and $460 price target, wrote on Thursday.
Netflix 'poised to outperform'
Pricing changes will also help boost operating margins, a key profitability metric. Margins hit 22.4% in the quarter, slightly ahead of Netflix's own projection of 22.2%. The company said it expects full-year operating margin to hit 20% — the high end of its previous forecast of 18% to 20%.
The company expects full-year operating margin to improve to roughly 22% to 23% next year, assuming no material swings in foreign exchange.
"We believe this clearer outlook will be well received by investors," Bank of America analyst Jessica Reif Ehrlich wrote in a note published on Thursday. The analyst reiterated her Buy rating and $525 price target on shares, saying the company is "poised to outperform."
That clearer outlook also prompted bullish sentiment from Keybanc analyst Justin Patterson, who upgraded the stock to Overweight from Sector Weight with a $510 price target.
The analyst agreed Netflix is entering 2024 "with a cleaner story" as the password sharing crackdown appears to be working, given the surge in subscribers and positive commentary from management, while operating profit and free cash flow are "steadily ramping."
"Despite increased competition, NFLX remains the dominant streaming platform and maintains the largest market share of US TV viewership," Oppenheimer analyst Jason Helfstein added. "We believe NFLX’s dominance will continue, given its clear advantage in producing high-engagement content and monetizing that content more effectively than peers."
Helfstein increased his price target on shares to $475 from $470, citing tailwinds from the password sharing crackdown and the company's higher 2024 operating margin projection.
'More work to do' on ad-supported tier
But despite the overall optimism in the report, there was one area of concern — the advertising tier.
Netflix said the adoption of its ads plan continues to grow, with membership up almost 70% quarter over quarter. The company said there's still "more work to do to scale this business," particularly when it comes to securing higher ad dollars.
"The ad tier is still slow to take off," Macquarie analyst Tim Nollen wrote in a note to clients, saying that although he's optimistic on the upside potential of paid sharing and advertising, he's also "conscious of the time it will take for these [initiatives] to contribute."
Nollen maintained a Neutral rating on the stock and $410 price target.
Needham analyst Laura Martin, who maintained her Hold rating on the stock, cited the slower-than-expected ad growth as a "worry" for investors in 2024. She said Netflix pursuing a sponsorship model for its ad product, which will allow advertisers to "partner" with a new movie or TV show, "is time intensive."
"Also, sponsorship revs focus on hit content, which is a poor strategy in a business with 15% hit titles (typically)," she added.
Other concerns for Martin include the impact of the ongoing actors strike on content, consumers reverting back to linear TV amid "streamflation," and higher churn from price increases.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at [email protected].
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