Netflix (NASDAQ:NFLX) stock rose 1% (As on January 12, 12:08:58 AM UTC-4, Source: Google Finance) after the company upgraded by Jefferies Financial Group to Buy from a “hold” rating. The analysts also raised the price target by $75 to $385 per share despite cutting 2023 EPS estimates by 9%. They believe that new initiatives, namely AVOD (advertising-based video on demand) and password-sharing changes, will drive top line outperformance. However, these are not likely to happen in the near term.
“We’re upgrading Netflix to buy based our belief that a well executed strategy of launching AVOD with password sharing changes will drive revenue and adj EBTIDA well above Street estimates, resulting in margin upside and valuation expanding back towards historical averages,” the analysts wrote in a client note.
Netflix could generate more than $40 billion in revenue by 2024, fueled by a $6-7B boost from AVOD and incremental SVOD (subscription video on demand) members. Jefferies also estimates that adjusted EBITDA could come in at $10.9B in 2024. Both estimates are above the current Street consensus.
On the other hand, the company’s r 6% year-over-year revenue growth in Q3 was driven by a 5% increase in average paid memberships and a 1% rise in ARM. In APAC, revenue grew 19% excluding F/X as average paid memberships rose 23% year-over-year. ARM was -3% year-over-year, excluding F/X, partially driven by lower ARM in India, somewhat offset by higher ARM in Australia and Korea. We added 1.4m paid memberships in the region (vs. 2.2m last Q3). In LATAM, revenue increased 19% year-over-year, supported by ARM growth of 16% vs. the year ago quarter excluding F/X. For Q3, operating income totaled $1.5 billion vs. $1.8 billion in Q3’21. Operating income was above the beginning-of-quarter forecast, partially due to higher revenue, as well as a shift in timing of some spend from Q3 to Q4. As a result, operating margin of 19% was above the 16% forecast. The four percentage point year-over-year decline in operating margin is almost entirely due to the appreciation in the US dollar vs. most other currencies during this period.
For Q4’22, the company is expecting revenue of $7.8 billion with the sequential decline entirely due to the continued strengthening of the US dollar vs. other currencies. On a constant currency basis, this equates to 9% year-over-year revenue growth. The revenue growth forecast is driven by the expectation for 4.5m paid net adds (vs. 8.3m in Q4’21) and ARM growth of 6% year-over-year, excluding F/X.