Netflix shares powered higher into the close of Friday trading, notching their biggest single-day gain in a year, following a solid set of third quarter earnings and a host of Wall Street price target changes for streaming media giant.
Netflix (NFLX) , which along with Alphabet-owned (GOOGL) YouTube produces more streaming minutes than all their major competitors combined, is looking to grow its share of revenue from ad-supported tiers on its platform following its crackdown on password sharing last year.
The move was designed to keep viewers from leaving to other platforms by offering cheaper alternatives to Netflix's ad-free offering and has enabled the group to continue adding paid subscribers while opening a new revenue stream from advertising markets worldwide.
The pace of those subscriber gains is slowing, however, and Netflix has said that starting next year it will no longer publish details of the additions starting from next year.
That leaves investors to focus on revenue growth in its ad-supported tiers and on profit margins tied to its broader platform sales and the money it spends on new content and technologies.
That said, Netflix still added around 5.1 million new subscribers over the three months ended in October, a tally topped Wall Street's 4 million consensus forecast and included around 2.5 million people opting for the ad-free tier where it was available.
More subscriber gains forecast
The Los Gatos, Calif., group also beat Wall Street's profit forecast with a bottom line of $5.40 a share and posted stronger-than-expected third quarter revenues of $9.83 billion, a 15.1% increase from the same period last year.
Adding to the bullish thesis, Netflix also said subscriber gains over the final three months of the year would grow even faster than they did over the third quarter, thanks in part to new live sports offerings and the return of the hit South Korea-made drama 'Squid Game.'
"We are in the subscription and entertainment business. And you can see in our results it's a pretty good business, and it appeals to a very large segment of consumers and fans," Co-CEO Ted Sarandos told investors on a conference call late Thursday.
"Our top 10 films that premier on Netflix all have over 100 million views, among the most-watched films in the world," he added.
Related: Netflix hints at when subscriber rates may rise
What the group didn't deliver, however, was a change in the pricing of either its ad-supported tier, which starts at $6.99 in the U.S, or its main ad-free platform, which costs $15.49 per month.
"We try to think about our pricing mostly not in relationship to competitors but from the value that we're delivering to members," said Co-CEO Greg Peters. "So, we want to have a range of price points. We think that that's healthy."
"So, I'd say with all of that in mind, we'll continue to evaluate based on those factors," he added. "We'll continually try to offer consumers a spread of plan choices, the right features at the right price point, and evaluate that and evolve it based on what we think works."
Ad-supported gains just beginning
KeyBanc Capital Markets analyst Justin Patterson, who lifted his Netflix price target by $15 to $785 a share following the earnings report, focused more on the group's nascent ad-revenue contribution and its potential to grow earnings in 2025 and beyond.
"Our sense is that Netflix is alluding to raising price during 2025, and Netflix has already started raising prices in select European countries and Japan during" the fourth quarter he said.
"With investments in 2025 likely to support monetization (both through price increases and advertising), we see potential for reaccelerating [earnings-per-share] growth into 2026."
Benchmark analyst Matthew Harrigan, who took his Netflix price target $10 higher to $555, said profit margins are likely to widen next year, even without a U.S. increase.
But he added that longer-term gains will come from "newer initiatives such as [ad-based video on demand] and extensions like gaming as volume growth moderates."
Related: Netflix users are losing one of its cheaper options
"We do acknowledge Netflix is executing significantly better than other media companies with major global scaling advantages, even if the stock appears overpriced to us in a momentum market," said Harrigan, who carries a sell rating on the stock.
"Benchmark’s thesis is consumer preference and profit models dictate more momentum toward a unified global television spending [total addressable market] for advertising and subscription with Netflix a certain winner even as older media companies struggle," he added.
Mike Proulx, research director at Forrester VP, noted that while Netflix's financial metrics — revenue growth and profit margins — are trending in the right direction, he remains concerned about the slowing pace of subscriber gains.
"While there’s room for net subscriber growth internationally, in the US things are getting tapped out," he said. "“That’s why accelerating growth via advertising becomes paramount to Netflix’s go-forward strategy and also why the company will stop reporting on subscriber numbers come 2025."
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"In a way it’s a ‘don’t look here’ tactic to draw attention away from a material deceleration in new subscribers and, instead, draw focus to overall revenue, which gives a fuller picture of the company’s financial health," he added.
Other price-target changes include Oppenheimer analyst Jason Helfstein, who lifted it by $50 to $825 a share, and Piper Sandler analyst Matt Farrell, who raised it $40 to $840 per share.
Netflix shares surged 11.1% higher on the Friday session to close at 763.89 each, a move that extends the stock's year-to-date gain to around 63% with a market value of $328 billion.
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