How Badly Will Disney Hurt Netflix Earnings?

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Netflix Inc. (NASDAQ: NFLX) is scheduled to release its fourth-quarter financial results after the markets close on Tuesday. The consensus estimates call for $0.53 in earnings per share (EPS) and $5.45 billion in revenue. The same period of last year reportedly had $0.30 in EPS and $4.19 billion in revenue.

Netflix continues to expand its footprint in terms of its international numbers, but it faces some stiff competition domestically in the form of Disney and Apple entering the online streaming industry. With this competition comes tough questions that Netflix will have to answer going forward. As a result, Needham took a renewed look at the streaming service and where it could go from here.

In December, Needham downgraded Netflix to Underperform from Hold and said it anticipated as many as 4 million subscriber losses in 2020 amid increasing competition in the streaming market.

The firm also noted that Netflix needs to add in a lower-priced service to compete with new entrants (such as Apple, Disney+, Hulu and CBS) but that its balance sheet will not really support a lower-tier priced service.

In the report, Needham detailed:

We project NFLX will lose 4mm US subs in 2020 at its premium priced tier of $9-$16/ month. We believe NFLX must add a second, lower priced, service to compete with Disney+, Apple+, Hulu, CBS All Access and Peacock, each of which have $5-$7/month choices. Since NFLX’s balance sheet cannot withstand lower revenue (our view), we recommend a 6-8 minute/hour ad load to supplement a $5-$7/month consumer fee.

Excluding Tuesday’s move, Netflix stock had underperformed the broad markets with a decline of about 4% in the past 52 weeks. In the past quarter, the stock was actually up about 16%.

A few analysts weighed in on Netflix ahead of the report:

  • UBS has a Buy rating with a $405 price target.
  • Pivotal Research has a Buy rating and a $425 price target.
  • Citigroup’s Neutral rating comes with a $325 price target.
  • Wells Fargo rates it as Underperform with a $265 price target.

Netflix stock traded down 0.7% at $337.22 a share on Tuesday, in a 52-week range of $252.28 to $385.99. The consensus price target is $363.21.

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