In Monday morning trading, Netflix (NASDAQ:NFLX) shares saw a slight increase of 0.2%, reaching $395.88, following a 10% drop last week. This modest rise brings the company's year-to-date gain to 35%. The drop in share price has been attributed to several factors, including the company's planned growth of operating margins, the nascent stage of its advertising revenue business, and the impact of ongoing Hollywood strikes.
The team of analysts from Evercore ISI, led by Mark Mahaney, maintained their Outperform rating on Netflix shares but reduced their price target to $500 from $550. They highlighted three key points made by Netflix at a recent conference. Firstly, the company plans to increase operating margins more slowly than 3% per year in the future. Secondly, its advertising revenue business is still in its early stages. Lastly, ongoing Hollywood strikes are negatively impacting the business.
Analysts predict that Netflix's content expenditure over the coming years will remain largely stable, leading to a slow increase in gross margins. However, they argue that the decision to grow operating margins more gradually lacks a firm strategy behind it. They speculate that additional margins might be allocated towards developing an ad-selling infrastructure or offsetting higher content costs.
Regarding advertising revenue, analysts noted an imbalance between demand and supply for Netflix ad space. They suggested that this issue could be resolved over time as recognition and selection of Netflix's ad-supported offering grows.
The Hollywood strikes present two significant challenges for Netflix. Firstly, they may lead to a gap in the company's content schedule. Secondly, they could delay potential price increases. Analysts anticipate that Netflix will raise its subscription prices but suggest that this should be accompanied by an improvement in content quality and quantity to provide better value for subscribers.
According to FactSet data, opinions on Netflix shares amongst Wall Street analysts are divided. 53% of analysts covering the shares have Buy ratings, 40% have Neutral ratings, and 7% have Sell ratings.
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