Why Netflix May Be the King of Earnings Season

January 11, 2019 by Jon C. Ogg

Source: Wikimedia Commons
After serious market volatility and many market leaders having seen their shares pull back drastically from their 2018 highs, investors have tried to make heads or tails of what to expect ahead. This is the time that corporate earnings growth is projected to fall. And the trade war issues and slowing global growth story still persist. Yet, some companies are growing rapidly and may be almost entirely insulated against any of those pesky macro-issues.

Netflix Inc. (NASDAQ: NFLX) has been a market darling for years, and it still rose by 39% in 2018, even considering how much the market sold off. Netflix also saw its shares pull back, closing out 2018 at $267.66. But now shares have traded back up over $330. That’s a gain of 23% after less than two weeks of trading in the new year.

It turns out that, even with some mixed analyst directional target calls, investors are by and large expecting yet another great earnings announcement out of Netflix. The company is set to report its end of 2018 earnings on January 17 after the market trading closes.

What was amazing about Netflix at the end of 2018 was that the consensus analyst price target of $389.85 from Thomson Reuters implied upside of 45.6% for 2019. This seemed ludicrous, considering the market volatility at the end of 2018 and considering how much the shares had pulled back based on many valuation and financial concerns around the stock. Zoom forward less than two weeks and suddenly the shares are up more than 20%, and another 20% is never considered to be an impossible feat on Wall Street.

There is something happening though that investors need to consider. Netflix’s consensus analyst target price has actually drifted lower in 2019 while the shares have screamed higher. There is a chance that the upside is still incredibly high for investors who are seeking growth wherever they can find it.

24/7 Wall St. has tracked multiple analyst calls, and the expectation sure looks to be that Netflix is being set up to be the king of earnings season for January. That is at least what a short gain of this sort suggests. That said, if Netflix has poor guidance or very disappointing metrics, then there will be hell to pay in its share price.

On Friday, January 11, Netflix had multiple analyst calls. Morgan Stanley maintained its rating at Overweight but lowered its price target to $430 from $475. Raymond James raised it to Strong Buy from Outperform and raised the price target to $450 from $435. Lastly, UBS raised Netflix to Buy from Neutral with a $410 price target. Netflix had previously closed up 1.5% at $324.66, and initially it traded up another 1.6% at $330.00 on the day. Before these calls, the consensus target price was $389.85.

On January 7, Barclays maintained its Overweight rating but lowered its target to a more attainable $375 from $430.

On January 4, Goldman Sachs reiterated it as Buy with a $400 price target. The firm noted that Netflix is one of the most compelling names in the internet space and added it to the prized Conviction Buy List, now that shares have lost more than one-third of their value since last summer.

On January 2, Netflix was trading lower on the first trading day of 2019 after SunTrust Robinson lowered its price target to $355 from $410. The firm cautioned its clients that Netflix was likely to see subscriber additions in the key fourth quarter to come in under the consensus estimate and also under the company’s own prior guidance.

Back in mid-December, MKM Partners called on Netflix shares to rise about 30% per year for the next five years. Its price target of $415 was based on strong fundamentals and earnings growth as strong as ever. The firm also forecast that its $12 billion in annual spending was a driver for upside rather than just a drag on earnings.

Prior to the MKM analyst call, Barron’s warned about Netflix with some caution. One issue was that Netflix was valued at 66 times expected earnings, and that is with rising competition coming from Disney late in 2019. It also pointed out the debt-burdened balance sheet.

A look over the Thomson Reuters consensus estimates shows that Netflix is valued at 126 times expected 2018 earnings per share. Its same earnings multiples are valued at 81 times expected 2019 earnings and about 50 times expected 2020 earnings.

Netflix shares were last seen trading up 3.4% at $335.50 on Friday. Its 52-week range is $216.00 to $423.21. That consensus target price of $389.95 at the end of 2018 now is actually down to $380.59 after the most recent changes.

Investors will want to consider much more than just earnings here. There will be content costs and subscriber additions that will closely watched, and its guidance will be watched even closer to make sure that it can achieve future targets.


I'm interested in the Newsletter