Barclays Lowers Netflix Rating, Predicts Slowdown in Revenue Growth

Netflix has established itself as a strong player in the content streaming industry, experiencing significant growth in popularity. However, analysts at Barclays predict that the company’s revenue growth is likely to decelerate.

In a recent client note, Barclays downgraded its rating of Netflix from “Equal Weight” to “Underweight.” The analysts expressed concern that new initiatives, such as paid subscription sharing and efforts to enhance profit margins, are prematurely advancing future growth and creating “unrealistic” long-term expectations for the company.

The analysts stated, “Given this backdrop, Netflix’s current valuation seems misaligned with its potential growth trajectory.”

They further noted that to compensate for reduced pricing and slower subscriber growth in key markets, Netflix will need to significantly boost its advertising revenue at a much faster rate than it has achieved so far. This would require considerable growth in advertising inventory, which is dependent on substantial increases in subscriber numbers or engagement in its ad-supported tier.

The analysts also suggested that this strategy might compel Netflix to eliminate its basic tier in more markets and possibly even the standard tier in the future. Such changes would likely increase the price disparity between the ad-supported tier and the other tiers, pushing more users to view ads. However, they cautioned that this approach might involve trade-offs in user engagement.

These remarks follow Netflix’s July announcement regarding its advertising division, which analysts hoped would be a significant revenue source for the company. However, it is not expected to become a major driver of revenue growth until at least 2026.

Chief Financial Officer Spencer Neumann mentioned that while the ad-supported model is experiencing growth, it still originates from a relatively small base. Netflix reported a 34% increase in memberships for its ad tier from the previous quarter during the April to June period, though it did not disclose the total number of subscribers opting for this option.