Netflix logs worst drop since July as analysts peg subscriber reporting pivot as culprit

Netflix (NASDAQ:NFLX) paced Communications stock decliners Friday, slipping 8% in the first 90 minutes of trading (its worst drop since July) after what looked for all purposes like a strong first-quarter earnings report.

The company beat financial expectations with near-15% growth in revenue, ahead of the Street and well ahead of its own forecasts, thanks in large part to another surge in membership that outpaced expectations. Meanwhile, the company’s ad-supported service is showing rapid growth.

Some analysts waded through the positive results looking for trouble in the subscriber outlook (Netflix guided to slower growth for what is a traditionally seasonally weak quarter), while others pointed to the import of Netflix’s decision to phase out its reporting of subscriber numbers entirely. The streaming pioneer stopped offering guidance on its subscriber figures before, and now plans to stop reporting the number entirely starting in the first quarter of 2025.

That key decision “cements” the argument that Netflix is no longer a growth stock, Seeking Alpha analyst and Investing Group leader Michael Wiggins de Oliveira wrote.

“For investors, who were previously accustomed to gauging Netflix’s prospects on an increase in membership basis, this change was a shock. Investors craved transparency. But it was only natural that at some point its membership growth rates would start to moderate,” he said, adding “given a few weeks or at most a month, the market will in time get over this.”

First-quarter outperformance was “robust,” agreed Seeking Alpha analyst and Investing Group leader Livy Investment Research, but the policy change means uncertainty: “In fact, margin expansion, free cash flow growth, and a pivot in focus on scaling ad operations have driven management’s decision to remove subscription and ARM disclosures beginning in 2025. The stock’s adverse response in late trading following the Q1 earnings release potentially highlights the market’s pricing of uncertainties ahead. Particularly, by removing performance metrics such as paid subscriptions and ARM, it becomes increasingly difficult to partition Netflix’s growth and, inadvertently, margin drivers ahead.”

Bernstein boosted its price target, but just to $600 and maintained a Market Perform rating with a focus on the disclosure change: “Fewer disclosures is a rite of passage for large tech companies, namely Apple, Google, and Meta. On the other hand, removing growth disclosures signals a maturing business, and gives shareholders even fewer data points to underwrite forecasts.”

Wedbush agreed the subscriber-numbers change was the biggest takeaway: “This decision is consistent with our oft-repeated assertion that Netflix would inevitably pivot from a high-growth, low-profit business to a slow-growth, high-profit business. However, the pivot to high profit and low growth is far from complete.”

Still, “We think Netflix has reached the right formula with global content creation, balancing costs, and increasing profitability. We think Netflix will continue to expand profitability and generate increasing free cash flow,” Wedbush said, reiterating an Outperform rating and $725 price target.

Oppenheimer reiterated its Outperform rating and $725 target, while J.P. Morgan reupped its Overweight stance and $650 price target. BofA raised its price target to $700.

Needham took the chance to upgrade Netflix (NFLX) to Buy, with a $700 target, raising estimates on revenue growth upside: “We believe: a) Generative AI will MOST benefit companies that are tech-first, and NFLX qualifies; b) NFLX has global scale, which maximizes the value of its data; c) price increases; and d) ad rev should accelerate rev growth and expand margins. Additionally, we believe NFLX’s [free cash flow] and [return on invested capital] will over-deliver estimates.”

And Pivotal Research boosted its price target to a Street-high $800 (implying a hefty 40% upside) — acknowledging, but largely dismissing, the disclosure change and saying “This is what winning looks like.”

“It is abundantly clear that NFLX is demonstrating massive scale as it continues to produce strong subscriber results and free cash flow with the ability to invest to accelerate that growth… while its streaming peers continue to generate substantial losses,” analyst Jeffrey Wlodarczak wrote.

As for cutting subscriber number reporting, “we remind investors that AAPL stopped disclosing iPhone unit growth in 4Q 2018 and after a short period of stock consolidation the stock materially outperformed the market,” he said, adding there’s a “long runway for subscriber/ARPU growth going forward.”