Netflix Gains as Analysts' Praise Mitigates Threat of Rivals
Netflix Impresses Wall Street Amid Competition, Low Expectations
(Bloomberg) -- Netflix Inc.’s performance in international territories coupled with a strong content slate ahead of the Oscars helped to improve sentiment on Wall Street. Several analysts praised the streaming service’s third-quarter earnings, indicating that management’s effort to stave off increasing competitive threats may pay off -- for now.
Shares in the company rose as much 7.9% in early trading Thursday, the most intraday since January.
The earnings relief added to investor confidence, with JPMorgan expecting Netflix to add subscribers “at a healthy pace” in the fourth quarter. But the in-line report will likely draw mixed reviews, says Raymond James, adding that bulls will argue that Chief Executive Officer Reed Hastings left room for upside while “bears will focus on two straight misses of U.S. paid net adds and point to softer” fourth-quarter guidance.
Macquarie analyst Tim Nollen says “in some ways Netflix has defied the naysayers” with this print. However “it will be hard for Netflix to grow much more in the U.S., and we suspect pricing power is limited,” he said, cutting the stock to neutral from outperform. Huber Research downgraded the stock two levels to underweight from overweight.
Netflix shares had gained about 7% so far this year before the results, having fallen about 23% from a peak in May.
Here’s what analysts are saying about Netflix’s results:
JPMorgan, Doug Anmuth
Overweight, price target $425
Net adds not as bad as feared. Earnings provide increased confidence that company will continue to add subscribers at a healthy pace while withstanding new competitive streaming threats.
Fourth-quarter content is very strong with “The Irishman,” “Marriage Story” and “The Two Popes” among titles. More streaming options will ultimately accelerate the shift away from linear TV, benefiting Netflix.
Pleased to see international business return to growth in paid net subscriber additions, and while fourth-quarter sub numbers will ease globally, company guidance on this appears achievable amid strong film-driven content.
Loop Capital, Alan Gould
Buy, $425
Results will ease near-term concern about a more significant miss, but missed guidance for two consecutive quarters isn’t a comforting sign of end-market demand ahead of what will be a more competitive fourth quarter.
Results will remind investors of the inconsistency in third-party data providers, especially for international projections.
Stock is likely to grind higher through the quarter, but event path will remain challenging into competitive launches. That said, these results still reflect a very good growth story and there should be a much greater buzz from the mainstream media on a strong content slate, especially into the Oscar awards.
Goldman Sachs, Heath Terry
Buy, price target raised to $400 from $360
Sees considerable upside to management’s subscriber guidance for the fourth quarter and consensus expectations for next year, given the strength of the content program, a more stable pricing environment and weakening competition from traditional television.
Continues to believe Netflix’s shares will outperform as the company’s content investments, distribution partnerships and marketing drive subscriber growth significantly above consensus expectations, and as Netflix approaches an inflection point in cash profitability.
RBC Capital Markets, Mark S.F. Mahaney
Outperform, price target raised to $420 from $450
Quarterly global subscribers came in a tad light, due to weakness in U.S., while international was ahead of Street. 2020 revenue estimate reduced 2%.
Shares rose 10% in after-market due to much better than feared international subs. Remain bulls as 2019 streaming revenue growth excluding-FX was close to 2018 levels and operating margins are “ramping rapidly.”
BMO Capital Markets, Daniel Salmon
Outperform, price target $440
Investors should be building positions as Netflix works through competitive worries and begins to see free cash flow losses narrow in 2020, even if Netflix is not quite fully “back on track” and competitive launches are still on the horizon.
Fourth-quarter guidance includes the biggest original film slate in the company’s history, and no price increases in any major countries.
Piper Jaffray, Michael Olson
Overweight, price target $400
Netflix reported in-line total subscription additions for the third-quarter, while the revenue and EPS outlook for the fourth quarter is below Street expectations as the company weighs content uncertainty and new competition from Disney and Apple.
Despite an onslaught of new streaming services, expect Netflix to continue to capture a significant portion of traditional content dollars as they migrate to streaming.
Macquarie Capital, Tim Nollen
Neutral from outperform, price target $325
“In some ways Netflix has defied the naysayers in 3Q, coming close enough to guidance and delivering impressive revenue and earnings growth.”
“We still think its opportunity is excellent, especially internationally where sub adds should continue to step up. But its hard to deny the U.S. is maturing, with sub add growth halving this year and the revenue effect of the price increases wearing off” in the first quarter of 2020.
“We expect competition coming from Disney+ and others especially in the U.S. will have only modest effect on church, but we think it will be hard for Netflix to grow much more in the U.S., and we suspect pricing power is limited.”
MoffettNathanson, Michael Nathanson
Neutral, price target $210
“If anything, we would say that this earnings print is a major relief to the bulls who were stunned by the stock’s post-2Q results and the ensuing reaction over the past 90 days.”
“This is the first time that Netflix has had successive quarters of missing their U.S. subscriber estimates.”
“With over 60 million subscribers in the U.S., Netflix may have reached the upper band of their S-curve and could see slower incremental net add growth from here, for a number of reasons.”
SunTrust Robinson, Matthew Thornton
Buy, price target $402
“We thought international results/guidance were very solid/satisfactory” though U.S. results and guidance were a bit disappointing, with second-quarter price increase-induced churn still elevated through the third-quarter “despite the very robust content slate.”
Evercore ISI, Vijay Jayant
In-line, price target $300
“While Netflix 3Q results may have been better than some feared, after-market trading activity likely represents a ‘relief rally’ which could be short-lived.”
“Of course, the Internet TV opportunity is substantial and Netflix is well-positioned to emerge as a secular winner.”
“However, to underwrite shares at current levels we think the business needs to show better-than-expected pricing and margin/cash flow trends, on top of several more years of robust subscriber growth, to justify valuation.”
Raymond James, Justin Patterson
Strong buy, price target $415
Despite the conservative 4Q guide, Raymond James highlights three reasons for optimism around long-term growth vectors, including: that mobile plans are resonating, and will likely be expanded; international originals are increasing meaningfully; and ARPU is increasing 10% y/y at constant currency.
“Bears will focus on two straight misses of U.S. paid net adds and point to softer 4Q guidance as a sign churn/price elasticity, competition, and mixed content slates are weighing on trends.”
“Bulls will argue management struck a pragmatic tone and left room for upside.”
Huber Research, Craig Huber
Underweight from overweight, removes $390 price target
"Starting November and in 2020 streaming competition intensifies which likely will increase quarterly volatility in forecasting quarterly net paid members at Netflix, setting up for further quarterly disappointments."
"In addition, Netflix will likely have to hold off on further price hikes through 2021 while at same time there should be upwardly biased programming costs going forward given heightened streaming competition, etc."
Canaccord Genuity, Michael Graham
Buy, price target $415
"While sentiment for the stock may remain somewhat tempered until investors gain comfort with the new competitive landscape, we continue to think Netflix’s $15 billion cash content budget and the breadth of its existing content library should allow it to maintain its market leadership."
"The breadth of Netflix’s content library continues to differentiate it from other streaming services, particularly its local language library."
--With assistance from William Canny.
To contact the reporters on this story: Kit Rees in London at krees1@bloomberg.net;Joe Easton in London at jeaston7@bloomberg.net;Kamaron Leach in New York at kleach6@bloomberg.net
To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Monica Houston-Waesch, Morwenna Coniam
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