Not everyone on Wall Street is on board for the bullish ride Netflix (NFLX) stock has been on in recent months.
Shares of the streaming beast are up 18% in the past three months, blowing away the Nasdaq Composite's 9% drop amid optimism surrounding Netflix's upcoming ad-tier service.
Analyst Doug Anmuth estimated in a new note this week that Netflix could drive 7.5 million subscribers to its ad-supported tier in its US and Canada segment in 2023, which could drive $600 million in advertising sales in 2023 for the segment. Anmuth also expects those numbers to swell to 22 million subscribers and $2.65 billion in advertising sales by 2026 as Netflix's execution on selling ads improves.
But for other pros, this rosy outlook is overdone.
That's the tone from two bearish notes from Pivotal Research and Goldman Sachs out on Tuesday. These notes, along with broader market volatility, sent Netflix shares down nearly 7% in Tuesday's trading.
Here's what those analysts had to say about Netflix:
Goldman Sachs Analyst Eric Sheridan
Rating: Sell
Price Target: $182
Downside Projected: -20.8%
"Since its last earnings report, Netflix has outperformed the market... on the back of a mix of 'better than feared' subscriber losses in Q2 and growing investor optimism about the company’s dual initiatives — building toward a product launch for an ad supported subscriber tier and beginning to implement a crackdown on password sharing in some overseas markets," Sheridan wrote. "On the former, as we have had a number of conversations with advertising industry checks, we stand by our analysis of the opportunity set for Netflix that we first introduced in our last quarterly earnings preview as we expect a host of large scaled brand advertisers will adopt the offering but its current framework (large minimum commitment, above industry pricing and limited measurement) could cap the advertising dollar opportunity unless it evolves."
In addition, Sheridan warned that "additional subscriber offerings could cause 'spin down' into the lowest priced plans by users in any potential consumer recession over the next 6-12 months."
Pivotal Research Analyst Jeff Wlodarczak
Rating: Sell
Price Target: $175
Downside Projected: -23.9%
"In the end, this is not rocket science," Wlodarczak wrote. "We view Netflix's move to launch an ad supported alternative as fraught with ARPU [average revenue per user], technological, financial and product risk. If Netflix were an upstart player looking to add subscribers, ad supported could be a no brainer but as the incumbent operator it seems to offer more risk than reward mainly given the existing sub repricing/results variability risk. We don’t see significant subscriber acceleration in the key U.S. market from the move, beyond a potential short-term benefit, and in most international markets the ad opportunity per sub is dramatically less than in the U.S."
As a result, he continued, "we view the potential transition of ultimately 40-60% of Netflix subscriber base to ad supported as a very risky endeavor which combined with increasing levels of competition (exacerbated by the fact certain players are not focused on profitability in the core streaming business) and the existing still rich valuation leads us to continue to be cautious on the stock."
The analyst noted one other headwind Netflix faces as streaming companies battle over subscribers.
"A last under-appreciated risk here is that Netflix management believes they can moderate the growth in content costs when virtually all of their peers are accelerating investment in content particularly on exclusive sports rights which could ultimately hit Netflix subscriber growth or push the company to reaccelerate content investment spend," Wlodarczak said.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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