Barclays on Netflix (NFLX): 'Margin expansion pace to slow in 2025 and potentially beyond'
Barclays analyst Kannan Venkateshwar reiterated an Underweight rating and $550.00 price target on Netflix (NASDAQ: NFLX)
The analyst comments "Margin expansion pace to slow in 2025 and potentially beyond: The company’s margin performance in 2024 has been the standout KPI in our opinion but as we highlighted in our recent downgrade note (please see Netflix, Inc.: Growth algorithm getting more complex; downgrade to UW, 7 Oct 2024), this is driven by a very unique set of factors that have helped content and marketing costs. In this context, we highlighted the fact that the biggest tailwind to margins thus far has been marketing and this would be difficult to use as a source of margin expansion going forward. In the quarter, marketing cost did step up more than expected. The company also seems to expect a higher pace in marketing cost growth next year, partly on account of in sourcing the headcount to drive ad revenues. This is one of the risks we had flagged in our downgrade as well. In our opinion leverage from content costs is unlikely to be as high as this year as is already evident in the increase in cash spend on content, which will partly impact content amortization next year. The company does admittedly have discretion on how much it spends on content year and therefore this could remain a useful bridge to manage revenues. However, with the impact of paid sharing lapping and engagement growth being anemic, the company may find it tougher to manage margins by delaying content next year. Overall, we do not think the quarter or the guidance will change consensus expectations on margins or EPS for next year or 2026 but may make it more difficult to defend EPS upside expectations vs consensus embedded in present valuation. Also, we would note that as advertising’s share of revenues grows in the next couple of years, it will get tougher to justify Netflix’s valuation premium vs other high growth ad dependent names or on an absolute basis, as we looked at recently (please see Netflix, Inc.: Growth algorithm getting more complex; downgrade to UW, 7 Oct 2024). Also, with the company stopping unit and price disclosure starting next year, lower visibility around key levers may also manifest in valuation."
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Shares of Netflix closed at $687.65 yesterday.