Investing.com - Netflix Inc (NASDAQ:NFLX) is set to disclose its third-quarter financial results on Wednesday after trading hours, and stakeholders are keen to learn about the company's approach towards password sharing, potential advertisement-supported services, and prospective price increments.
The streaming giant, which has recently seen a few Wall Street downgrades, left investors underwhelmed in the second quarter when its revenue didn't meet expectations and its Q3 forecast was lower than anticipated.
The revenue shortfall is attributed to the delay in the full implementation of the company's advertising tier, which challenges its objective of achieving double-digit revenue growth.
Spencer Neumann, Netflix's CFO, commented on the advertising tier last month, acknowledging the challenges in establishing an ad business from the ground up and the substantial work ahead.
Furthermore, Netflix reported lower than projected average revenue per membership (ARM) and predicted that the ARM for Q3 would either remain unchanged or decline slightly compared to the corresponding period in 2022. This is despite the company's expectation of gaining 6 million new subscribers in Q3 due to stricter password-sharing measures.
According to consensus estimates from Bloomberg, Wall Street analysts are predicting Q3 EPS of $3.56 and revenues of $8.53 billion, with subscribers lifting by 6.2 million.
As many of Netflix's initiatives are unlikely to influence its bottom line until next year, analysts are advising investors to focus on the long-term prospects.
Steve Cahall, an analyst at Wells Fargo (NYSE:WFC), noted in a recent report that Netflix would be investing in ad tech and content, which might slow down margin expansion but could also boost revenue. Despite reducing his price target for the stock from $500 to $460, he maintained an Overweight rating due to his positive outlook on the company's long-term growth. Netflix shares, which have dipped about 20% in the past three months, are currently trading around $355.
Investors are closely monitoring margins after Neumann stated his expectations for full-year operating margins to be between 18% and 20%, aligning with the company's projections.
Neumann anticipates margins to improve as growth initiatives start to bear fruit, and other factors such as the company's expansion into gaming and increased licensing opportunities begin to contribute.
Despite the potential for higher content costs to put pressure on margins, the addition of more licensed content will help Netflix expand its library in the long term.
There are also rumors that Netflix is considering a price hike for its ad-free streaming tier once the ongoing actors' strike concludes. However, the company has not commented on these reports. The timeline and the amount by which its monthly $15.49 plan would increase remain uncertain.