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After a 340% surge in shares, Wall Street now warns Netflix's meteoric rise may have peaked, with concerns over slowing growth ahead of its third-quarter earnings report.

After a staggering rally that boosted Netflix’s market value by over $230 billion, Wall Street is now signaling that the streaming giant’s meteoric rise may have hit a ceiling. Since hitting a low in May 2022, Netflix shares soared nearly 340% to reach a record high earlier this month. However, signs of slowing growth have caused concern among analysts as the company prepares to release its third-quarter earnings report.

The company’s impressive revenue growth in recent quarters was largely driven by two key strategies: a crackdown on password sharing and the introduction of lower-priced, ad-supported subscription tiers. These initiatives helped Netflix maintain double-digit growth, but analysts warn that these growth drivers may be losing momentum. According to Barclays analyst Kannan Venkateshwar, Netflix’s ability to maintain high revenue growth may be waning as these strategies may have pulled future growth forward.

The stock’s strong performance has left Netflix shares trading just 3% below the average analyst price target, suggesting limited upside potential in the near term. Data from Bloomberg places Netflix among the bottom 20 stocks in the Nasdaq 100 Index for implied returns, signaling that Wall Street doesn’t expect much more growth in the next 12 months.

Netflix is expected to report third-quarter revenue growth of 14%, down from the 17% peak growth achieved in the previous quarter. A further slowdown is anticipated over the coming periods. Analysts have emphasized the importance of key metrics such as sales and average revenue per member as the company adjusts its business model to offer multiple pricing tiers.

Concerns About Valuation

As Netflix’s revenue growth decelerates, concerns have been raised about the company’s valuation. Currently, Netflix trades at 32 times forward earnings, significantly higher than the Nasdaq average of 26 times and far above other streaming competitors like Walt Disney Co., which trades at 19 times, and Paramount at just 7 times. Some investors may begin to see Netflix stock as overvalued unless the company can meaningfully improve its earnings.

Matthew Maley, chief market strategist at Miller Tabak + Co. LLC, suggested that Netflix needs to focus on expanding its advertising partnerships globally to improve profitability. He argued that Netflix will need to address the “E” (earnings) part of its price-to-earnings (P/E) ratio if it hopes to sustain its stock price growth. Without significant improvements in profitability, Maley cautioned that Netflix’s stock may struggle to maintain momentum.

Strategies for Future Growth

Despite these concerns, some bullish investors believe that Netflix still has avenues for growth. One key strategy is to raise subscription prices, a move that could immediately boost revenue. Thomas Martin, senior portfolio manager at Globalt Investments, noted that Netflix has a loyal subscriber base willing to pay more for the service. He argued that the company has room to raise prices without alienating too many customers, as Netflix remains competitively priced compared to its rivals.

Jefferies analyst James Heaney echoed these sentiments, highlighting that Netflix has transitioned from being a “premium” offering to a “value” option. With rivals like Disney+, MAX, and Hulu charging higher prices, Netflix may have an opportunity to raise its prices without losing market share. However, price hikes are a lever that Netflix can likely only use occasionally. While an increase in U.S. subscription prices could temporarily boost the stock, analysts like Citi’s Jason Bazinet warn that any gains from such a move would likely be short-lived.

Long-Term Risks

While raising prices could provide a short-term boost, it may not be a sustainable strategy in the long term. The risk of alienating price-sensitive customers, especially in a market where consumers are already cutting back on non-essential spending, is significant. In recent months, consumers have been pulling back on discretionary spending, such as online food deliveries and entertainment services, as inflation remains high and economic uncertainty lingers.

There is also growing concern that Netflix’s traditional growth strategies may not be sufficient to maintain the high expectations set by investors. The password-sharing crackdown and ad-supported subscription tiers provided a temporary boost to subscriber numbers and revenue, but they may not drive sustained long-term growth. With growth expectations moderating, Netflix will need to explore new revenue streams or risk disappointing investors.

The Global Advertising Market

Expanding its advertising partnerships remains a key focus for Netflix as it seeks to grow its revenue in the face of slowing subscriber growth. Advertising offers a significant opportunity for the company, especially in international markets where the ad-supported tier has gained traction. While Netflix has made strides in developing its advertising capabilities, it is still relatively new to this space compared to other tech giants that have well-established ad networks.

To compete effectively, Netflix will need to continue investing in its advertising infrastructure and forming partnerships with global brands. The ability to scale its advertising efforts, particularly in emerging markets, could provide a meaningful source of revenue growth. However, this is a long-term strategy that will take time to develop and scale, leaving some uncertainty about how quickly advertising can drive significant profitability.

Netflix’s recent 340% rally has been impressive, but signs of slowing growth are starting to surface. Revenue growth, once bolstered by the company’s crackdown on password sharing and the introduction of ad-supported subscription tiers, appears to be losing steam. With analysts forecasting a slowdown in growth over the coming quarters, concerns about the stock’s valuation and long-term prospects are growing.

While Netflix has several potential growth levers, including raising subscription prices and expanding its advertising partnerships, these strategies come with risks. Price hikes could alienate price-sensitive customers, and the advertising business will take time to scale. As a result, the stock’s high valuation may start to look too expensive for some investors unless the company can demonstrate sustained profitability improvements.

The upcoming third-quarter earnings report will be a key indicator of whether Netflix can continue its growth trajectory or if the recent rally was its peak. Investors will be watching closely for any signs of slowing revenue growth or challenges in executing the company’s new business strategies.