Netflix, Inc. (NASDAQ:NFLX) shocked Wall Street by reporting below-consensus first-quarter revenues and a loss of net paid subscribers.
The Netflix Analyst: KeyBanc Capital Markets analyst Justin Patterson maintained a Sector Weight rating on Netflix shares.
The Netflix Thesis: Netflix's first-quarter results reinforce KeyBanc's view that gross adds is an industry-wide challenge, given market penetration rates and increasing competition, Patterson said in a note.
Fixes such as a crackdown on password sharing and building an ad-supported service will take about 18-24 months, the analyst said. KeyBanc's survey suggests that there is more interest for ad-supported content among Netflix subscribers than non-subscribers, he added.
"As such, we would be surprised to see meaningful impacts to models in 2023E," Patterson said.
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The analyst also said he is skeptical about how content investments can fix the current issues. Netflix spent about $17 billion on content in 2021 and is on track to expend another $18 billion in 2022, the analyst noted. The popular series Bridgerton may be a hit, but it has not helped increase hours versus season one, he added.
"While we agree content quality is better than it was three to five years ago, we also struggle to see where Netflix can improve upon the talent it brought onto the platform the past year," Patterson said.
As Netflix prioritizes revenue growth for now, operating margins may have peaked and may not see an improvement in the near term, the analyst said.
NFLX Price Action: Netflix stock is seen tumbling over 27% to $251.90 in premarket trading Wednesday.
