Heading into Netflix’s Thursday night June-quarter earnings report, Wall Street analysts had been steadily ratcheting up both earnings estimates and price targets on the streaming-video giant. Netflix has been an obvious beneficiary of the shutdown of sports, movie theaters, and other normal entertainment options—and we’re all stuck at home, tired of watching the news and looking for diversions. So why not watch Money Heist?
But almost inevitably, expectations got a little out of hand. In the March quarter, Netflix (ticker: NFLX) added 15.8 million net new subscribers, more than twice the 7 million the company had projected. In the June quarter announced on Thursday, the company added another 10.1 million subscribers, above guidance at 7.5 million but shy of some of the Street’s more optimistic projections. And Netflix is projecting just 2.5 million net new subscribers for the September quarter, less than half of what had been the Street consensus view.
It’s that particular number that has the stock sagging Friday. Netflix said flat out that it thinks that the strong growth in the past two quarters pulled in growth that otherwise would have come in later quarters. In short, the Covid-powered period of accelerated subscriber growth has hit a wall.
You’d think that analysts would be miffed, but with the exception of a few naysayers, most of the commentary on the quarter was overwhelmingly positive. More than a dozen analysts actually raised their price targets on Netflix shares on Friday.
The bull case has several parts.
It’s bigger! J.P. Morgan’s Doug Anmuth notes that the surge in subscriber growth has been accompanied by reduced churn—and the result should be “a bigger Netflix” in the long run.
It’s making money! Morgan Stanley’s Benjamin Swinburne points out that this was the first quarter of substantial free-cash-flow generation since the company shifted from DVDs by mail to streaming over a decade ago. “When the dust settles,” Swinburne writes, “we expect 35 million net adds and positive free cash flow for the year—reinforcing our confidence in long-term cash operating leverage in the business.”
It’s leading! From a longer-term point of view, the company continues to dominate the subscription streaming business. “Netflix continues to be an attractive long term growth story within media as it maintains its leadership position as the preeminent premium global subscription video on demand service and Netflix benefits from secular adoption of streaming and investment into the company’s expanding content portfolio,” writes Deutsche Bank’s Bryan Kraft.
It’s filming! The company noted that it is shooting new material throughout Asia and in many countries in Europe, though U.S. production is still limited so far. The company expects more new content in 2021 than in 2020, though with more material in the second half than the first.
All that said, the bears scored a few points this round, and the general case is that this is as good as it gets.
Stifel’s Scott Devitt, who has a Hold rating on the stock, sees “limited near-term catalysts to support further multiple expansion.” Benchmark’s Matthew Harrigan, who keeps a Sell rating on the stock, says upside surprises to subscriber growth are unlikely for the next few quarters, pointing to the company’s warning that the 2021 content slate will be concentrated in the second half due to recent production delays. He also thinks that “momentum investors are likely to abandon the stock.”
Needham’s Laura Martin, who keeps her Underperform rating, wonders how things can possibly get any better for Netflix from here. “Live sports was dark, cinemas, theaters, music festivals, theme parks, cruises, etc. were closed for all of Q2, Netflix was the only company consistently airing new content throughout the quarter, and billions of potential subs were sheltering at home owing to health or government official directives. How does it get any better for Netflix?” she writes.
Credit Suisse analyst Douglas Mitchelson cut his rating on the stock to Neutral from Outperform, citing a lack of near-term catalysts. He notes that investor concerns over the “3 C’s”—competition, content quality, and cost of content—have waned. But looking ahead, he sees more subdued subscriber growth, tough comparisons, and the risk that interest in stay-at-home plays will wane as the economy reopens.
Netflix shares are down a relatively modest 6.8%, at $491.79, in recent trading, roughly erasing gains from the past 10 days. The stock is still up 52% year to date and continues to sport a market cap that exceeds that of AT&T (T), Walt Disney (DIS), and Comcast (CMCSA).
Write to Eric J. Savitz at eric.savitz@barrons.com
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July 16, 2020 at 08:15PM
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Netflix Erases Recent Gains on Soft Outlook, but Most Analysts Are Still Bullish - Barron's
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