Netflix stock pops. Why Citi is on the sidelines.

Netflix (NFLX) reported better-than-expected third quarter results, sending the streaming giant’s shares higher and fueling bulls' confidence. Citi managing director Jason Bazinet joins Seana Smith and Brad Smith on Morning Brief to explain why he’s staying neutral on Netflix stock.

“The fundamentals were really good, so there's nothing really to pick out there. What I'm a little bit nervous about is what I would just call the sort of shifting bull case on the stock,” Bazinet tells Yahoo Finance, explaining that the bar keeps getting higher for the bull case of the stock with accelerating multiple expansion.

“I just get uncomfortable when I start hearing that because when you have multiple expansion like that, you usually need an accelerating top line. And Netflix's top line is actually decelerating as we move forward. So they're going to do 15% growth this year. And they're guiding to 11% to 12% growth next year.”

The analyst says another area of concern is engagement growth. “They talk about their engagement being up, but it was up only 1%, so the question is, they're spending a lot of money on content, but they're not getting the response function in terms of deeper engagement.”

He adds, “It's really not a question of how much do they have to spend. I think it's more a function of, are they spending on the right things that will cause consumers to stay glued to Netflix, get those engagement numbers up, and then allow Netflix to take price.”

To watch more expert insights and analysis on the latest market action, check out more Morning Brief here.

This post was written by Naomi Buchanan.

Video Transcript

Let's kick it off with Netflix.

You're looking at gains in the stock and extended hours up just about 6.5% shares.

Rallying to the upside after the streaming giant beat on both the top and bottom lines.

As this ad to your memberships jumped 35% from the previous quarter to discuss the latest earnings sprint.

We wanna bring in Jason Bazinet.

He's city's managing director, Jason, it's great to have you back.

So you're taking a look at some renewed optimism.

It looks like on the street stock moving to the upside on this move except you remain.

I think it's fair to say maybe a bit cautious with your neutral rating.

Why?

Well, let's see, what can I tell you the fundamentals were really good?

So there's nothing really to pick out there.

What I'm a little bit nervous about is, is what I would just call the sort of shifting bull case on the stock.

And what I mean by that is at the beginning of this year, the Bulls were looking for a bull case of 625 which is essentially $25 per share of earnings and 25 at a 25 multiple.

You talk to those Bulls now and they've moved to 26 and they want to put a 30 multiple on it.

So they're, they're now saying 30 times 30 so $900 I just get uncomfortable when I start hearing that because when you have multiple expansion like that, you usually need an accelerating top line.

And Netflix's top line is actually decelerating as we move forward.

So they, they're going to do 15% growth this year and they're guiding to 11 to 12% growth next year.

And so with that in mind, how much are they going to need to spend in order to see that growth come to fruition?

Jason?

Well, it's really interesting, I mean, this, this gets back to another one of my areas of concern.

I mean, they talk about their engagement being up but it was up only 1%.

And so the, the, the the question is is they're spending a lot of money on content, but they're not getting the response function in terms of deeper engagement.

And um and so it's really not a question of how much do they have to spend.

I think it's more a function of, are they spending on the right things that will cause consumers to stay glued to Netflix, get those engagement numbers up and then allow Netflix to take price, Jason.

What do you think would do that?

Well, I so the the Scuttle butt is that um they are trying to focus on a lower volume of content, but focus on more marquee content that's going to cause sort of excitement.

And so I think that that's sort of the shift that I anticipate is maybe fewer hours produced but higher quality.

And Netflix has said that they really want to buy IP.

And I think that's one of the things that Hollywood learned a long time ago is that you need IP to really ring the cash register, you know, on these iconic, you know, stories that are out there that really um get people engaged and you can do that if you don't have IP.

But it just is a much higher risk proposition.

Jason, you're, you're cautious on, on Netflix as we've been discussing, but the company's stock is up over the course of 2024 up by about 46% over the past year.

It's up nearly 100%.

So all these things considered, I mean, some of those headwinds, we could argue have been at play for a while.

They were talking about how much they wanted to spend on licensing.

They were talking about getting more into sports, that's more so those dollars out the door and trying to figure out where they could carve out space for them to compete.

And so it seems like investors are, are putting that to the side, even with some of the concerns that could be prevalent.

Uh that's not playing out in the, the, the story for shareholder returns right now.

Well, yeah, so let, let me just step back a bit.

So we caught a lot of that, that uh upside in the stock, we downgraded it in January of this year.

And I think this is what I think is really going on, which puts fundamental analysts like me in a bit of a quandary.

What I think is happening is portfolio managers that were overweight, sort of the mag seven are calling their analysts.

And they're saying, give me a what I'll call a tier two tech stock that's not a mag seven stock.

And so the analysts all come back and they say, oh Netflix and so what you're seeing is money sort of come out of those mag seven stocks into Netflix.

But, and that's resulted in multiple expansion that's not really underpinned by as much earnings growth.

And so it puts me in a difficult spot.

Could the multiple go to 35 times?

Could it go to 40 times?

Could it go to 50 times?

It can?

But in my seat, what I really need to, what I like to see is things where the multiple is expanding and the fundamental support it.

And that's, that's not really what's happening here.