The story of Netflix is just beginning, but analysts have divergent opinions.

Netflix kicked off the tech company earnings season. On the surface, Netflix's earnings report doesn't look great.

First-quarter revenue was in line with expectations, up only 4%, with net new subscribers of 1.75 million, about 500,000 lower than analysts' expectations. As for the second quarter, the company's expectations for revenue, profit, and user growth are lower than Wall Street's general expectations.

But even so, Netflix's story is still in a transformational phase and should bring returns to patient investors.

Some Progress

Netflix has launched two initiatives aimed at promoting growth - ad-supported subscription tiers and cracking down on password sharing. But the impact of these projects may take several quarters to show up in financial performance.

Netflix has already launched password control in four markets - Canada, New Zealand, Spain, and Portugal - calling the plan "paid sharing."

The company said the pattern in these markets is for users to lose some first and then quickly rebound.

Meanwhile, Netflix has made solid progress in its advertising strategy. In the United States, ad-based plans generate more revenue per user than standard subscription plans. It is estimated that each subscriber generates more than $8.5 in ad revenue per month.

Netflix will increase the video quality of its ad-supported service this month and add the ability to watch two streaming services simultaneously in some markets.

Citigroup analyst Jason Bazinet estimates that this ad-supported tier could increase Netflix's subscriber base by 65 million.

Other Good News

Netflix has raised its free cash flow expectations for 2023 from $3 billion to $3.5 billion and said it will maintain its content budget for 2024 at the same level as this year, at $17 billion.

In addition, the company expects revenue growth to accelerate in the second half of the year as paid sharing and advertising businesses develop.

Meanwhile, Netflix bought back $400 million in stock this quarter and plans to be more aggressive in buybacks.

Analyst Views

Goldman Sachs analyst Eric Sheridan pointed out that the new challenge facing Netflix investors is how to evaluate the positive impact of limiting subscribers and advertising in an increasingly challenging economic and competitive environment.

Sheridan has a sell rating on the stock, but he noted that in the long run, cracking down on password sharing and advertising "could open up new avenues for user growth."

However, he said Netflix's stock price has risen 39% in the past six months, largely reflecting this.

Wedbush analyst Alicia Reese is more optimistic. She has a "beat the market" rating on Netflix and has just added the stock to her "best creative" list.

Netflix has been around for 25 years and is looking for new ways to improve efficiency. And unlike many large tech companies, it has not yet conducted large-scale layoffs.