Yahoo Finance

We're tracking shares of Netflix as well this morning. NFLX feeling some pressure after the streaming giant's Q3 revenue guidance fell short of expectations. Shares though are up by about 1%. The stock originally dropped 6% though on Thursday. The stock is regaining some of those losses as I mentioned as investors digested another eight million plus subscriber gain driven by a strong content slate and benefited from its top line initiatives like its crackdown on password sharing. For more on this, we're joined by John Blackledge, who is the TD Cohen managing director and senior equity research analyst here. Great to have you here with us. So let's talk a little bit about these results. I mean, in terms of where it stacks up against some of your own expectations and what this means for what many have looked at as the best in class, at least on margin performance. Does this further solidify investors' expectations or is there something else at play here?

Yeah, no, no. It was it was definitely a solid quarter and and the guide was good. You know, like you mentioned for 2Q they they do eight they added 8 million net member adds. That that was a record for 2Q outside of um uh 2Q 20, the first year of COVID and it was above our and consensus estimates of about 5 million. It was kind of within investor expectations. And then, you know, the 2Q revenue was mostly in line, but like you said, they beat on margins again uh and earnings. And for for the full year for 2024, they raised their revenue guide a little bit and then they raised their up margin uh guide for the third time since they set it to 26% from 25%. They're looking for uh essentially five uh five points of margin expansion this year, uh which is great. All in, we kind of kept our our forecast mostly in line uh and uh our price target remains at 775 and and maintained maintained buy there. We view, you know, there is a good amount of upside from here, um you know, despite the stock being up quite a bit this year.

John, what does that upside look like, do you think?

The upside to 770, like what drives you up?

Yeah, yeah, exactly. What what's going to be the catalyst here to keep that momentum going in that direction?

Yeah, I mean, it it's it's uh so global streaming leader, right? Um management said last night, we just talked about the margin expand, the big margin expansion this year. Um they expect margins to continue to rise next year and going forward, um free cash flow rising, uh stocks trading at uh about 27 times earnings. We think some of those factors that I just mentioned could drive um a multiple expansion and what I'd also point out is on the ad tier, I thought they were pretty bullish on the long term. Um and also kind of on the near term, right? They expect the ad tier uh to reach critical scale uh by next year in all 12 of the Avon markets. In other words, they're going to get to a certain number of members that are uh attractive for big brand advertisers in those markets and to boost those goals, um they're retiring the basic tier in in US and France like now, this quarter, uh like they did in UK and Canada last quarter. And so another driver uh certainly in the coming years is the ad tier. We have ad tier members over 30 million this year and then rising to over 40 million next year and kind of growing from there. And just lastly or, you know, somewhat lastly on the on the ad tier, um management has said like, hey, it's a good entry point uh for uh for consumers in those markets. Um so it should be a a a tailwind to member growth uh in the coming years.

Where would you like to see Netflix spend right now? Is it on sports rights? Is it on more content that they produce or is it on licensing?

Yeah, uh great question. So they told us right and they they confirmed um that they're going to spend about 17 billion in cash content spend this year. That's up from about 13 billion-ish uh last year. And um what we're seeing now, the next leg of of content uh evolution for the company uh is live events, right? And um, you know, if you know, I've covered the stock for a really long time and if if we go back to when they started streaming and um they started advancing in in making their own content, um they first started doing episodic and and then they were then their goal was to launch five or six episodic uh uh shows across different genres. And then it was to launch a film a week, and then it's making content in 40 countries. And now the next leg of the content is live events to your point. Um and you know, we have they're going to uh stream globally two NFL games in the in the fourth quarter. They have uh Tyson fight coming up. They had the Brady roast and and so this is, but it's so early. It's just starting. And so this is another leg um for them of content, which should be helpful uh for, you know, for user engagement.

The the infamously censored Brady roast, John. My goodness. I mean, I just wanted to hear some people get booed, but anyway, John Blackledge, TD Cohen managing director and senior equity research analyst. Thanks so much for taking the time.

Thank you.