Citi’s senior analyst Jason Bazinet says investors expected three things from Netflix (NASDAQ: NFLX) – and its Q1 earnings delivered on “none”.
Bazinet’s remarks arrive shortly after the streaming giant posted a “double beat”; per-share earnings of $1.23 on a whopping $12.25 billion in revenue for its first financial quarter.
Netflix stock is still trading down about 10% on Friday morning.
Netflix stock sinks on three major disappointments
Following Netflix’s decision to stop pursuing large-scale M&A – specifically the abandoned WBD deal – investors were expecting three things from the company to remain bullish.
First, they expected roughly a quarter of a billion dollars in deal-related expenses to be unwound, providing an immediate lift to margins.
Second, the market assumed Netflix would use its freedom from regulatory scrutiny to aggressively raise prices globally, boosting revenue guidance.
Third, shareholders anticipated a massive buyback expansion since Netflix is no longer hoarding cash for acquisitions.
But the company delivered on “none”, Bazinet told CNBC, adding NFLX shares are slipping post earnings because “the run-up going into the print was on those expectations, and they were dashed.”
Lack of clarity in engagement metrics is hurting NFLX shares
Investors have been laser-focused on organic growth and engagement as NFLX no longer reveals the total number of subscribers, but Bazinet characterized the firm’s commentary on viewership also as “unsatisfying”.
On the earnings call, management acknowledged that “viewership numbers weren’t great” in Q1, but pointed to its own metric for different ways to measure engagement to defend its performance.
However, the firm refused to divulge that internal metric – creating what the Citi analyst described as a transparency gap.
According to him, Street remains fixated on external data that signals cooling organic engagement.
In short, Netflix shares are slipping because the company’s “trust us, our metric is fine” approach has failed to provide the clarity investors needed to justify the valuation multiple.
What Netflix must do to maintain its dominance
Beyond tactical misses, Bazinet identified a looming strategic threat that Netflix must eventually confront: the rise of “ungate-kept” content.
With the proliferation of advanced AI tools, user-generated content (UGC) is rapidly eating into the market share of traditional high-budget video, gaming, and publishing.
The Citi analyst expressed deep concern over this shifting consumer trend, noting that NFLX stock may soon face a “strategic issue” regarding the quality and relevance of its content library.
To remain the industry leader, Netflix must navigate this “next wave” of entertainment, where the barrier to high-quality creation is falling, and the competition for eyeballs is moving away from Hollywood studios and toward the creators themselves.
That said, the rest of Wall Street remains largely bullish on the mass media and entertainment giant – as evidenced in its consensus “overweight” rating and nearly $115 mean price target.
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