Analyst Insights

Citi Issues Neutral Rating on Netflix Amid Cautious Optimism for Q2 Earnings

Citi sets a price target of $660, highlighting Netflix's ad-tier rollout and password-sharing crackdown as key growth drivers

By Harrison Wall

7/10, 21:04 EDT


Stock Rating: Neutral
Revised Price Target: $660.00
Previous Price Target: N/A
Stock Price (July 10, 2024): $677.65

Summary Points

  • Netflix's 2Q24 net additions forecast at 5.5 million, above consensus but below 1Q24, with cautious optimism ahead of earnings.
  • Citi maintains a Neutral rating with a $660 price target, reflecting Netflix's industry leadership and growth potential.
  • Ad-tier rollout and password-sharing crackdown are key growth drivers, with potential upside if ad-tier exceeds expectations.

Cautious Optimism Ahead of Netflix's 2Q24 Earnings

Citi's latest equity research report on Netflix, Inc. (NFLX.O) provides a cautious outlook ahead of the company's 2Q24 earnings release. The report highlights mixed signals from Nielsen's US data, showing Netflix's share among all video platforms was up year-over-year in April but down in May. This mixed performance has led to tempered expectations for the upcoming earnings report. Citi forecasts 2Q24 net additions of 5.5 million, slightly above the consensus estimate of 4.9 million but below the 9.3 million net additions seen in 1Q24. The report suggests that investors are anticipating net additions to range between 6 million and 7 million for the quarter.

Neutral Rating with a $660 Price Target

Citi maintains a Neutral rating on Netflix with a price target of $660, which is based on a ~30x 2025E EPS multiple. This valuation exceeds both the S&P 500 and Netflix's peer group, reflecting the firm's industry leadership and robust growth profile. The report notes, "We believe the firm will benefit from the continued rollout of its ad-tier. However, at prevailing levels, we find the risk-reward relatively balanced." The cautious stance is driven by potential risks, including higher-than-expected content investments and the possibility of acquisitions.

Ad-Tier Rollout and Subscriber Growth

The driving factors behind Citi's investment thesis include the continued rollout of Netflix's ad-tier and the impact of the firm's password-sharing crackdown. The ad-tier is expected to provide a new revenue stream, while the crackdown on password sharing could lead to incremental subscriber growth. Citi's estimates for 3Q24 are slightly above the Street, with expected revenue of $9.96 billion and EBIT of $2.6 billion, compared to the Street's $9.81 billion and $2.5 billion, respectively. The report states, "If Netflix is able to grow its ad-tier offering ahead of expectations, there may be upside to our forecast and target price."

Competitive Landscape and Content Costs

Citi acknowledges several risks that could impact Netflix's valuation. These include the potential for more intense competition from other streaming services and the possibility of escalating content costs. If Netflix struggles to raise subscription prices or if its content investments exceed expectations, the firm's financial performance could fall short of forecasts. Additionally, the competitive landscape remains a significant factor, with other streaming services vying for market share. The report highlights, "If competition from other streaming services is more intense than we expect, the firm may deliver worse-than-expected revenue and EBITDA growth."

Valuation Recap & Outlook

Citi's valuation of Netflix at $660 per share is based on a ~30x 2025E EPS multiple, reflecting the company's strong growth profile and industry leadership. The report forecasts 2Q24 revenue and EPS to align closely with company guidance, with 3Q24 estimates slightly above the Street. Key valuation metrics include the firm's ability to grow its ad-tier and manage content costs effectively. However, risks such as competition and content cost escalation could pose challenges to this valuation. Citi remains cautiously optimistic, noting, "We see a positive risk/reward skew based on top-line momentum and margin/earnings recapture in ‘24/’25."

"We believe the firm will benefit from the continued rollout of its ad-tier. However, at prevailing levels, we find the risk-reward relatively balanced," says the Analyst.