A LOT is riding on Netflix to demonstrate that it is back in growth mode after a pandemic hangover, as the streaming giant reported earnings after market on Tuesday (Jan 23). 

The stock has gained more than 40 per cent since Netflix’s last report in October, which showed subscriber additions that blew past expectations. Wall Street sees this trend continuing, with revenue rising 11 per cent in the fourth quarter. That would be its fastest expansion in two years, when the company got a boost from the stay-at-home economy. 

The risk is that Netflix shares may have already priced in much of the anticipated good news – potentially putting them in a perilous position if results disappoint.

“Expectations for 2024 and 2025 are pretty high, so there are a few risks here that could cause it to underperform,” said Hanna Howard, portfolio manager at Gabelli Funds, citing aggressive revenue projections and higher content costs.

Much of Netflix’s 65 per cent stock advance in 2023 was tied to its efforts to boost sales. The streaming service launched a new advertising-supported subscription tier, raised prices and cracked down on password sharing, which contributed to a blowout Q3 and sparked a rally that helped push the stock to its best annual performance since 2020. 

“The sell side is expecting all sorts of good things to happen, and the buy side is actually on some of the key metrics even ahead of the sell side, so the setup doesn’t strike me as particularly favourable,” Citi analyst Jason Bazinet said on Monday. Citi recently downgraded Netflix to “neutral” from “buy”.

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Amy Reinhard, Netflix’s president of advertising, stoked expectations earlier this month when she said the ad-tier had reached 23 million global monthly active users, up from about 15 million in November.

Netflix is projected to add 8.9 million subscribers in the quarter, according to the average of analyst estimates compiled by Bloomberg. 

Some are more cautious given the valuation and risks ahead. Gabelli’s Howard said that potential headwinds “cause us to be a little bit more on the sidelines at current levels rather than buying”.

Still, for Wedbush analyst Alicia Reese, one of the key issues for Netflix shares is whether the company can keep content spending in check in coming years and maintain an advantage over rival streaming services such as Walt Disney Co’s Disney+ and Max at Warner Bros Discovery.

“It’s the only streamer that’s currently profitable and we think that they’re just going to widen the gap by keeping their content costs more efficient than their competitors,” said Reese, who has an “outperform” rating and a US$525 price target on Netflix. BLOOMBERG