Why More Analysts Refuse to Endorse Netflix Despite Great Earnings

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Despite Netflix Inc. (NASDAQ: NFLX) reporting very strong earnings and receiving an equally strong reaction from investors on Monday, analysts had a somewhat mixed perspective on the stock.

24/7 Wall St. has included some of the key highlights from the earnings report, as well as what analysts are saying after the fact.

The company posted $0.12 in earnings per share (EPS) and $2.29 billion in revenue. Thomson Reuters consensus estimates had called for $0.06 in EPS on revenue of $2.28 billion. In the same period of last year, Netflix posted EPS of $0.07 and $2.28 billion in revenue.

During the quarter, Netflix added 0.4 million members in the United States, versus its forecast of 0.3 million, and 3.2 million members internationally, versus 2.0 million forecast. The overperformance was driven primarily by stronger than expected acquisition due to excitement around Netflix original content. Total net adds for the quarter were 3.57 million, making a grand total of global paid memberships of 86.74 million.

In terms of guidance for the fourth quarter, Netflix expects to have $0.13 in EPS and revenue of $2.34 billion. The consensus estimates called for EPS of $0.07 on $2.4 billion in revenue.

For the fourth quarter, Netflix forecasts 5.2 million global net adds, with 1.45 million net adds in the United States and 3.75 million new members internationally. Overall management is pleased with the results thus far, as it expects the average selling price to grow 12% from the first quarter of 2016 to the fourth quarter of this year. Internationally, the initial demand from its launch in Spain, Portugal and Italy in the fourth quarter also will affect the year-over-year net adds comparison.

Loop Capital commented on the Netflix earnings report:

After the close, NFLX released Q3 2016 results which, in all facets, exceeded all of our pre-call metrics on the income statement, while simultaneously, subscriber gains in both the domestic and international categories exceeded both guidance and consensus. Income statement guidance for the current quarter was well above consensus, and overall Q4 sub guidance was higher than prognosticated. With that, on a few tweaks within our master DCF matrix, our price target shifts to $133.00 from $125.00.

FBN Securities has an Outperform rating for Netflix and raised its price target to $130 from $95. The firm believes that Netflix’s decision to license its content near-term in China (rather than operating its own service there) will please investors as China is generally a very difficult region for U.S.-based internet companies to succeed.

Wedbush Securities reiterated an Underperform rating and $60 price target. The firm continues to believe that Netflix is overvalued. In its report, Wedbush said:

Netflix continues to spend exorbitantly for original and exclusive content, while international profitability remains elusive and competition for both content and subscribers is becoming more fierce. In addition, cash burn is unacceptably high, and we are skeptical that the company can successfully build a content library that will justify its high level of spending. In our view, Netflix’s current share price fails to address the potential for meaningful competition from Amazon, which recently launched a video-only subscription option of its own, and although we acknowledge that Netflix has the much more powerful brand for SVOD, we are confident that with its new standalone service, Amazon declared war on Netflix.

Credit Suisse maintained a Neutral rating but cut the price target to $130 from $132. The firm said:

The heaviest of the churn headwinds appear behind the company, as it has now notified 90% of the users to be ungrandfathered and 75% of those have converted to the higher price. We feel that the next leg of value creation will come from the reduction of friction in its Int’l territories as Netflix looks to remove payment and language/localization hurdles on a market-by-market basis. On the content side, content liabilities increased by ~$1b sequentially and the company is now projecting 1,000 hours of original content released in 2017 vs. the outlook for 600 hours this year. Despite the improvement in operating margin, we continue to believe that Netflix’s pace of investment in content will only increase as the company looks to maintain its share of the consumer’s viewing time with the best content. Our near-term estimates rise modestly as we flow thru a larger subscriber base, partially offset as we moderate our Int’l net add assumptions in the out years to ~12-13mm net adds per year. We remain on the sidelines for now on valuation and maintain our Neutral rating.

A fair number of other analysts weighed in on Netflix after earnings:

  • FBR has a Market Perform rating with a $90 price target.
  • SunTrust Banks has a Hold rating with a $115 price target.
  • Deutsche Bank has a Sell rating with a $92 price target.
  • Robert Baird has a Neutral rating with a $120 price target.
  • Morgan Stanley has an Overweight rating with a $130 price target.
  • Citigroup reiterated a Hold rating with a $120 price target.
  • Needham reiterated a Hold rating.
  • Jefferies reiterated a Sell rating with an $80 price target.
  • BMO Capital Markets has a $115 price target.
  • Mizuho has a Neutral rating with a $112 price target.
  • Goldman Sachs has a Hold rating with a $140 price target.

Shares of Netflix were trading up 19% at $118.78 on Tuesday, with a consensus analyst price target of $104.07 and a 52-week trading range of $79.95 to $133.27.