Why do 2 analysts think the streaming giant is still a screaming salesman?

Not everyone on Wall Street agrees with the bullish ride Netflix (NFLX) shares have had in recent months.

Shares of the streaming beast have risen 18% in the past three months, outpacing the Nasdaq Composite’s 9% drop amid optimism surrounding Netflix’s next ad-grade service.

Analyst Doug Anmuth estimated in a new note this week that Netflix could generate 7.5 million subscribers at its ad-supported level in its US and Canada segment by 2023, potentially generating $600 million in ad sales. in 2023 for the segment. Anmuth also expects those numbers to rise to 22 million subscribers and $2.65 billion in ad sales by 2026 as Netflix’s execution on ad sales improves.

But for other professionals, this rosy outlook is overblown.

That’s the tone of two bearish notes from Pivotal Research and Goldman Sachs on Tuesday. These notes, coupled with broader market volatility, sent Netflix shares down almost 7% in trading on Tuesday.

Here’s what those analysts had to say about Netflix:

“Since its last earnings report, Netflix has outperformed the market … thanks to a combination of ‘better-than-feared’ subscriber losses in the second quarter and growing investor optimism about the company’s dual initiatives: moving forward toward launching a product for a subscriber-level ad-supported product and beginning to crack down on password sharing in some foreign markets,” Sheridan wrote. “On the former, as we have had several conversations with ad industry watchdogs, we are maintaining our analysis of the opportunity set for Netflix that we first presented in our last quarterly earnings preview, as we expect a large number of Large-scale brand advertisers will adopt the offering, but its current framework — large minimum commitment, above-industry pricing, and limited measurement — could limit the opportunity for the ad dollar unless it evolves.”

Additionally, Sheridan warned that “additional subscriber offerings could cause users to ‘downgrade’ to the lowest priced plans in any potential consumer downturn over the next 6-12 months.”

A man takes part in a mission for Netflix’s ‘Squid Game’ series at a department store in Bangkok, Thailand November 20, 2021. REUTERS/Chalinee Thirasupa

Fundamental Research Analyst Jeff Wlodarczak

“In the end, this is not rocket science,” Wlodarczak wrote. “We consider Netflix’s decision to launch an ad-supported alternative to be ARPU-laden [average revenue per user], technological, financial and product risk. If Netflix were an upstart player looking to add subscribers, ad support might be a no-brainer, but as an incumbent operator it seems to offer more risk than reward, mainly given the risk of underexisting earnings variability/re-pricing. We don’t see a significant acceleration of subscribers in the key US market from the move, beyond a potential short-term benefit, and in most international markets, the ad opportunity per subscription is dramatically lower than In U.S.A.

As a result, he continued, “we view the potential transition of 40% to 60% of Netflix’s subscriber base to ad support as a very risky endeavor that, combined with increasing levels of competition (exacerbated by the fact that certain players are not are focused on profitability in the core broadcast business) and the existing still-rich valuation leads us to remain cautious on the stock.”

The analyst noted another headwind facing Netflix as streaming companies battle for subscribers.

“A final understated risk here is that Netflix management believes it can temper growth in content costs when virtually all of its peers are accelerating investment in content, particularly exclusive sports rights, which could ultimately hurt growth.” of Netflix subscribers or push the company to speed up. investment spending on content,” Wlodarczak said.

brian sozzi is a general editor and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and in LinkedIn.

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