Netflix's ad stumble deepens fears its growth is hitting a wall

Oct 21 — Netflix's cut to its advertising sales forecast is fuelling concerns that its growth engine is losing steam, ​threatening the edge that made it a model for the media industry.

Shares of the company fell nearly 5% in Wednesday afternoon trading after Netflix forecast a fourth consecutive quarter of slowing revenue growth, ‌as one of Hollywood's biggest spenders on original content struggles to deliver major hits.

"Netflix is increasingly being judged against its own exceptionally high standards, ⁠raising questions about whether it has lost some of ​the focus and agility that once distinguished it from ⁠rivals," PP Foresight analyst Paolo Pescatore wrote in a client note. The stock has lost about a quarter ‌of its value this year, ‌with Netflix's failed pursuit of Warner Bros Discovery adding to concerns that it is running out ⁠of avenues for growth beyond price increases and its crackdown on ⁠password sharing.

Netflix's advertising business, long seen as a key source of future growth, is expanding more slowly than expected, while its push into gaming, backed by deals including one to add some "Grand Theft Auto" titles, has yet to make a meaningful contribution.

Meanwhile, YouTube and TikTok are competing for viewers with a steady stream of relatively inexpensive user-generated content, while the combination of Warner Bros Discovery and Paramount under Skydance is ‌set to intensify competition.

Netflix has responded by cutting 6% of its workforce ​and replacing two top programming executives.

Co-CEO Ted Sarandos said on Tuesday that the moves would allow Netflix to focus on its core business of producing TV shows and films aimed at making the service a must-have for consumers.

Some analysts said incoming content chief Peter Rice will help improve Netflix's film and television slate by sharpening its focus on prestige programming and drawing on his relationships with top creative talent.

"His industry relationships could prove valuable in attracting and retaining top filmmakers, especially following the departures of creators such as the ​Duffer Brothers, Shawn Levy, and Noah Baumbach," Citizens analyst Matthew Condon said.

"Rice's extensive experience overseeing live sports could support a more ambitious ‌approach to premium ‌sports programming, further enhancing ⁠Netflix's value proposition."

ANALYSTS CUT BACK EXPECTATIONS

More than 20 brokerages have cut their price targets on the stock following the results, according to LSEG data.

If current losses hold, the streaming giant is on track to lose about $13 billion in market value.

BofA Global Research analysts said the leadership change and layoffs were "a signal that management is focused on improving content ‌output and creative hit rates."

Netflix ​trades at nearly 18.3 times expected earnings over the next 12 ‌months, compared with 14.76 times ⁠for Walt Disney and ​6.26 times for Comcast.

(Reporting by Kanishka Ajmera and Siddarth S in Bengaluru; Additional reporting by Purvi Agarwal; Editing by Joyjeet Das ​and Shilpi Majumdar)

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