As Netflix's earnings draw nearer, its stock is getting a bit more controversial

By Emily Bary

Two analysts took a stronger stance on Netflix shares Monday - with one adopting a bullish view and another making a bearish call

As Netflix Inc. earnings approach, two analysts are feeling increasing conviction about the stock - but with far different conclusions.

At the end of last week, Barclays analyst Kannan Venkateshwar and Piper Sandler analyst Matt Farrell were both on the sidelines on Netflix shares (NFLX). But both arrived Monday with stronger calls, as Venkateshwar moved to an underweight rating and Farrell stepped up to a overweight stance.

Venkateshwar worries that it will be tougher for Netflix to maintain at least low-double-digit revenue growth in the future, something he said the stock's "premium valuation" demands.

He noted that Netflix has many strengths, which have helped the company build itself into a media powerhouse. Lately, though, Netflix has needed to try new tactics to jolt revenue, and Venkateshwar said that while a crackdown on account sharing seems to be working, it could be coming at the expense of future growth.

"Even with these levers, growth is slowing and every lever now has corresponding trade-offs," he wrote.

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For instance, Netflix is making a big push into advertising, but the company has gotten rid of its basic ad-free tier in several markets. Netflix may need "to do away with the basic tier in more markets and potentially even the standard tier at some point to increase the price gap between the ad tier and non-ad tiers significantly and force more of the base to watch ads," he wrote."

"It is tough to see how this doesn't come with its own engagement trade-offs," Venkateshwar continued. "Amazon (AMZN) tried this with Prime Video and forced every Prime subscriber to watch ads, which resulted in engagement dropping meaningfully."

Ventakeshwar's view seems to be winning the day so far, with Netflix's stock down 2.6% toward the end of Monday's session. He becomes just the third analyst to hold a bearish rating on Netflix shares currently, though that's the most since February.

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Farrell, though, takes a much rosier view of Netflix's positioning - and most analysts agree with him. Of the 51 tracked by FactSet who cover the stock, 33 have buy-equivalent ratings, 15 have hold-equivalent ratings and three have sell-grade ratings.

"Notably, our prior neutral stance was centered around valuation, but now, we appreciate the company is expensive for a reason," he wrote Monday. "Moving forward, there are still levers to be pulled in the ads-free business (particularly around pricing), while the ads-tier has been largely derisked heading into next year."

What that means on the ad front is that estimates now seem reasonable after the company's second-quarter report earlier this year. Plus, price increases could be in the cards.

From Farrell's perspective, Netflix doesn't need to rely on its past levels of subscriber growth to grow revenue at a double-digit clip. Additionally, there should be less pressure on subscriber performance in general now, since Netflix will no longer be reporting the metric next year.

He's also upbeat about margin trends - at least relative to expectations in the market. "While we don't expect 2024-level margin expansion moving forward, we think consensus margins could prove to be conservative in both 2025 and 2026," he wrote.

Netflix is due to report third-quarter earnings next Thursday. Shares are up 44% so far this year.

See also: Third-quarter earnings are upon us. So are worries of slower growth.

-Emily Bary

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10-07-24 1539ET

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