Needham analyst Laura Martin is recommending investors consider adding Netflix stock after the streaming company suffered a sharp premarket decline following its most recent quarterly update.
Netflix shares plunged close to 10% in premarket trading on Friday, a drop that followed guidance for the second quarter which fell short of analyst expectations and the company’s announcement that chairman and co-founder Reed Hastings would be stepping down.
The company said Hastings will not seek re-election at the company’s annual meeting in June and that he plans to shift his focus toward philanthropy.
While Netflix exceeded consensus on first-quarter revenue and profit, the outlook it provided for the current quarter disappointed the street. The company projected second-quarter earnings per share (EPS) of $0.78, below the Wall Street consensus of $0.84, and revenue of $12.57 billion, short of analyst expectations of $12.64 billion.
By contrast, Netflix delivered a strong first quarter: EPS of $1.23, well ahead of the $0.79 analyst estimate, on revenue of $12.25 billion. That revenue figure represented year-over-year growth of 16.2% and topped the consensus forecast of $12.18 billion.
Despite the weakened guidance, Martin identified several elements in the report she views as constructive for Netflix’s long-term economics. She highlighted the company’s expansion into new mobile engagement products - specifically vertical video, video podcasts, and kids games - and argued these features have the potential to reduce churn, increase pricing power, and improve customer lifetime values.
Martin also emphasized Netflix’s work to cultivate and manage fan communities around its programming, saying that building and sustaining fandoms is "every media company’s job to be done." She added: "In old media, NFLX does this best, alongside DIS, we believe."
In addition, Martin pointed to Netflix’s positioning as an early adopter of technology, citing moves into generative AI capabilities, programmatic advertising, and enhancements to content recommendations and personalization. Summarizing her thesis, she wrote: "Monetization follows time spent."
Summary
Needham analyst Laura Martin recommends buying Netflix after a near-10% premarket drop triggered by weaker-than-expected second-quarter guidance and the announcement that Reed Hastings will not seek re-election as chairman. Martin sees promise in the company’s new mobile engagement products, fandom-building efforts, and technology investments in AI and programmatic advertising, which she believes can support lower churn, better pricing power, and higher lifetime value.
Key points
- Netflix plunged close to 10% in premarket trading after issuing second-quarter guidance that missed expectations and announcing Reed Hastings will step down as chairman.
- Projected Q2 EPS of $0.78 and revenue of $12.57 billion were both below Wall Street expectations of $0.84 EPS and $12.64 billion revenue.
- Needham’s Laura Martin highlights new mobile engagement features, fandom management, and early moves into generative AI and programmatic advertising as drivers that could improve churn, pricing power, and LTV.
Risks and uncertainties
- Near-term guidance was weaker than analyst consensus, reflecting uncertainty about upcoming revenue and EPS performance; this impacts media and consumer internet sectors sensitive to subscription growth and advertising trends.
- Leadership change - the decision by Reed Hastings not to seek re-election - introduces uncertainty about company governance and strategic continuity, which can affect investor sentiment in the broader streaming and entertainment industry.
- Execution risk around new product initiatives - such as vertical video, video podcasts, kids games, and programmatic ad offerings - could delay anticipated benefits to churn, pricing power, and monetization, affecting both subscriber- and ad-supported revenue streams.