Netflix shares have taken a hit this year as investors worry about a spike in US cancellations following a March price hike and signs that viewers are spending less time on the platform. But Morgan Stanley, in a note Tuesday, argued the market has gone too far in extrapolating those concerns.
The investment bank cut its price target on Netflix to $90 from $115 ahead of Thursday's second-quarter earnings report, but maintained that the streaming giant's underlying business remains solid. The bank expects results and the next-quarter outlook to land roughly in line with Wall Street forecasts, which call for earnings per share of $0.79 on revenue of $12.58 billion, according to FactSet.
What's behind the engagement worries?
Investors have fixated on a 'larger than usual' spike in US cancellations after Netflix raised prices in March. The fear is that higher prices are driving away subscribers and that people are spending less time watching, which could hurt the company's long-term growth prospects.
When churn—the share of customers who cancel—rises, analysts typically lower their estimates for subscriber lifetime value. That can force Netflix to spend more on marketing and promotions to win back lost users, squeezing margins and pushing down the stock's valuation even if near-term revenue and profit look fine.
Morgan Stanley argues the market is treating a post-price-hike wobble like a lasting trend. The bank points to its own survey work, which it says still shows strong perceived original content and long-run pricing power for Netflix.
What to watch on Thursday
Thursday's reaction may hinge less on whether Netflix beats consensus earnings and more on any evidence that US churn is cooling. If the company can show cancellations are settling down, it would support the case that the stock's recent decline has been more about sentiment than fundamentals.
The bank also thinks a second-half lineup of live events and sports could help by creating more 'must-watch' moments that support engagement. Netflix has been investing in live programming, including comedy specials and sports events, to keep viewers coming back.
What it means for investors
For everyday investors, the key takeaway is that Netflix's $90 price target depends on whether US churn cools after the March price hike. When churn jumps after a price increase, markets often rerate a subscription business before earnings deteriorate. Higher expected cancellations shrink subscriber lifetime value and can force higher spending to keep audiences engaged.
That's the setup for Netflix's results. Morgan Stanley isn't denying the churn spike; it's arguing investors are extrapolating it too far. If Netflix can show cancellations are settling down and that live events and sports are lifting viewing time, it would support the case that the stock move has been more about sentiment than fundamentals, and it could reset how investors value the company.
Investors should also keep an eye on broader market trends. For instance, US inflation cooled sharply in June, which could boost hopes for Federal Reserve rate cuts and support growth stocks like Netflix. Meanwhile, JPMorgan's Q2 profit surged as investment banking fees jumped 30%, signaling strength in the broader financial sector.
Netflix's results will also be watched for any impact from the rise of GLP-1 drugs, which have reshaped eating habits and hit snack sales at companies like PepsiCo. While not directly related, the broader consumer spending environment could affect Netflix's subscriber growth.
The bottom line
Morgan Stanley's call is a bet that Netflix's engagement worries are overdone and that the company's content lineup and pricing power will win out. Thursday's earnings report will be the first test of that thesis. Investors should watch for any signs that US churn is stabilizing and that live events and sports are boosting viewing time.
