Are Analysts Too Optimistic After Netflix Earnings?

Overall, analysts were fairly positive after Netflix Inc. (NASDAQ: NFLX) reported its most recent quarterly results late on Wednesday, despite the increased competition it faces. While some say that the competition from Apple and Disney is already priced into the stock, it appears that most analysts see this as a buying opportunity.

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

Netflix posted $1.47 in earnings per share (EPS) and $5.245 billion in revenue, compared with consensus estimates that called for $1.04 in EPS and revenue of $5.25 billion. The third quarter of last year reportedly had EPS of $0.89 on $4.0 billion in revenue.

During the latest quarter, global net subscription additions totaled 6.77 million. In the United States, Netflix added 0.5 million memberships. Internationally, the firm added roughly 6.3 million memberships. Note that Netflix now has a total of 158.33 million total memberships worldwide.

Looking ahead to the fourth quarter, the company anticipates $0.51 in EPS on $5.44 billion in revenue. At the same time, the company expects to see net subscriber adds of 7.6 million. The consensus estimates call for $0.81 in EPS on $5.52 billion in revenue.

Credit Suisse reiterated a Buy rating with a $440 price target. While the firm expected inline results as the app download analysis did not suggest a material miss, this was well ahead of general buyside expectations for very disappointing international results (international ended up 55,000 ahead at 6.255 million, up a strong 1.2 million year over year).

Merrill Lynch reiterated a Buy rating but cut its price objective to $426 from $450. Merrill Lynch trimmed its 2020 subscriber estimates by 6 million to account for a lower cadence of domestic net additions and to add conservatism amid rising competition. The brokerage firm went on to say:

We still see international paid net adds growing in 2020 at 26mn paid net adds vs 24 million est for 2019. Netflix’s operating profit beat stands out, with margins of 18.7% vs guidance for 15.9%. Despite the fourth quarter boost, we see slower marketing spend growth and content amortization growing below revenue in 2020/2021, which continue to keep our EPS estimates ahead of the Street at $6.57/$10.23 vs. $6.49/$9.38, despite adjusting these down with revenue.

Wedbush reiterated an Underperform rating with a $188 price target. The boutique brokerage firm expects content spending to trigger substantial cash burn for many years. Also, content migration to competing services and price hikes may slow subscriber growth, and increasingly negative free cash flow makes discount cash flow valuation impossible. Wedbush said:

The company faces a steep uphill climb to replace the content it is slated to lose over the next two years. We estimate that by the end of 2021 Netflix will have virtually no content from Disney, Fox, Warner Bros. or NBCUniversal, and we think its efforts to replace that content with originals will only partially succeed.

Here’s what a few other analysts had to say:

  • CFRA reiterated a Buy rating but lowered its price target to $365 from $400.
  • Huber Research downgraded shares to Underweight from Overweight.
  • Cowen reiterated an Outperform rating and lowered its price target to $415 from $435.
  • Piper Jaffray reiterated it as Overweight and lowered its target price from $440 to $400.
  • Wells Fargo reiterated a Market Perform rating and raised its target to $308 from $288.
  • Guggenheim reiterated a Buy rating and lowered its price target to $400 from $420.
  • Nomura reiterated it at Neutral and raised its price target from $310 to $330.
  • Sanford Bernstein reiterated it as Outperform and lowered its target to $422 from $450.
  • Macquarie downgraded it to Neutral from Outperform and lowered its target from $375 to $325.
  • Goldman Sachs reiterated a Buy rating with a $400 price target.
  • JPMorgan reiterated a Buy rating with a $425 price target.

Shares of Netflix traded up about 2% to $291.25 on Thursday, in a 52-week range of $231.23 to $385.99. The consensus price target is $368.63.