Netflix Faces High Expectations Amid Potential Price Hikes and Ad Growth as Stock Nears Record Highs

Netflix (NFLX) is set to release its third-quarter earnings report this Thursday after the market closes, with high expectations as the stock trades near its all-time high. Analysts are also closely watching for a potential price hike announcement, which could serve as a key driver for the stock’s future performance.

According to data from Bloomberg, analysts estimate Netflix’s full-year earnings for 2024 to be around $19 per share, with 2025 earnings projected to approach $23 per share.

Here are Bloomberg’s key third-quarter projections:

Revenue: $9.78 billion (Netflix’s guidance: $9.73 billion), compared to $8.54 billion in Q3 2023.

Earnings per share: $5.16 (Netflix’s guidance: $5.10), compared to $3.73 in Q3 2023.

Net subscriber additions: 4.5 million, compared to 8.8 million in Q3 2023.

Investors have applauded Netflix’s expansion into sports and live events, while its ad-supported subscription plan continues to gain traction. As a result, Netflix’s stock has surged approximately 45% since the beginning of the year. Last week, the stock reached a record close of around $730, although it has since pulled back to about $705.

This significant rally has led to cautious sentiment among Wall Street analysts. Despite Netflix reporting that users watched over 94 billion hours of content on its platform from January to June, year-over-year engagement levels were roughly flat. This could present a challenge to the company’s pricing power, especially as consumers become more selective in their streaming subscriptions.

According to Deloitte’s latest Digital Media Trends report, U.S. consumers subscribe to an average of four streaming services, spending approximately $61 per month. Retaining loyal subscribers remains a challenge, as many frequently cancel or switch subscription plans.

Netflix last raised its Standard plan price in January 2022, increasing the monthly fee from $13.99 to $15.49, while the Premium plan saw another increase in October 2022, rising to $22.99. Meanwhile, its ad-supported plan, introduced less than two years ago, remains one of the cheapest in the market at $6.99 per month.

Citi analyst Jason Bazinet noted that due to Netflix’s low cost per hour viewed, the company may have room to raise U.S. subscription prices by 12% in 2025.

In addition to the potential price hike, Netflix’s growing advertising business is another area of focus for investors. Last quarter, Netflix reported a more than 150% increase in upfront ad sales commitments compared to 2023.

Netflix is also doubling down on live sports and popular shows, with upcoming releases like “Happy Gilmore 2” and “Squid Game 2” on the horizon. The company has also secured live sports content, including NFL Christmas Day games and WWE Raw, which will debut in January 2024.

Netflix previously stated that its goal is to make advertising a more significant revenue stream, which it expects to support sustained, healthy revenue growth by 2025. To this end, Netflix is phasing out its lowest-priced ad-free streaming plan, making the $15.49 Standard plan the most affordable option without ads.

Morgan Stanley analyst Ben Swinburne pointed out that the introduction of the ad tier provides Netflix with another lever to maximize revenue, aligning with the company’s “north star” of revenue maximization. He also mentioned that as competition in media eases and more studios opt for licensing deals, Netflix has solidified its position in the industry. Swinburne maintained his Overweight rating for Netflix and raised his price target from $780 to $820.

“In the aftermath of this volatile period of media disruption, Netflix has emerged in a leadership position that few foresaw a decade ago,” Swinburne commented.

Netflix’s recent performance has undoubtedly raised market expectations, but from my perspective as an analyst, while the stock continues to climb and approach record highs, there are short-term challenges that shouldn’t be overlooked. First, though the company plans to raise prices to boost revenue, the slowdown in user growth could hinder its pricing power. With consumers becoming more cautious about their streaming service choices, especially amid the current economic uncertainty, Netflix’s ability to attract new users and retain existing ones will be critical. In the long term, how the company balances price hikes with potential user churn will likely shape its growth trajectory.

Moreover, I believe that Netflix’s advertising business will be a key driver of revenue growth in the coming years. Although ad revenue currently contributes a smaller share, it offers the company a flexible income source as content production costs continue to rise. By increasing ad revenue, Netflix can maintain competitive subscription prices while gradually reducing its reliance on subscription income alone. This strategy, combined with its investments in sports and large-scale entertainment content, could generate substantial long-term returns in the future.