Netflix kicks off the new tech earnings season Tuesday after the market’s close, offering results that will be closely watched as the industry gets ready to transition to a post-Covid economy.
Netflix (ticker: NFLX) posted robust subscriber growth in the March and June quarters, as many Americans stopped going to the office—or anywhere else—and turned to streaming media services for entertainment. In the September quarter, subscriber growth slowed more than Wall Street had expected, leading to questions about the durability of the boom in the previous two quarters.
For the fourth quarter, bears see risks that subscriber growth could be muted by a combination of both a recent price increase and mounting competition from sites like HBO Max, Peacock, and Disney +. But it is also the case that the Covid-19 pandemic worsened in recent months, which may have boosted new subscriber growth and reduced churn.
Netflix has projected December quarter revenue of $6.6 billion, per-share profits of $1.35 and net new subscriber additions of 6 million, up from just 2.2 million in the September quarter. Street consensus for the December quarter is for $6.6 billion in revenue, profits of $1.38 a share, and 5.9 million net adds.
For Netflix, the subscriber number has often been more important to stock performance than the relative performance on the revenue and net income lines. But that could shift over time as the company turns positive on a free cash flow basis.
Morgan Stanley analyst Benjamin Swinburne noted this past week that Netflix is on a journey from a company driven by net adds to one tied to substantial free cash flow generation.
“Following the accelerated streaming adoption of 2020, Netflix this year is reinforced with unparalleled global scale and an even stronger competitive advantage that supports continued share gains in the broader $500 billon TV market,” he writes.
Swinburne, who has an Overweight rating and $650 target price on the stock, thinks Netflix shares now look cheap—he sees 30% upside, noting that the stock has seen its valuation decline during the Covid period. He keeps his Overweight rating and $650 price target.
Canaccord analyst Maria Ripps recently repeated her Buy rating and $630 price target on Netflix shares. Ripps writes in a research note that despite heightened competition, Netflix has continued to dominate viewing time in 2020, “thanks to the breadth and depth of its original content library.”
Ripps adds that while Netflix has raised prices and discontinued free trials, rivals have relied on substantial promotions to drive subscribers which could be more liable to churn out. She’s projecting 6.7 million subscriber adds for the December quarter, and 28.6 million for 2021, including 9.4 million in the first quarter.
J.P. Morgan analyst Doug Anmuth recently reiterated his Overweight rating and $628 price target. He’s projecting net adds in line with the company’s forecast, but thinks the buy side might actually be looking for 6.5 million. For the March quarter, Anmuth is projecting 6.9 million net adds.
Anmuth thinks sentiment on the stock is muted, with concerns about potential year-over-year net add declines in 2021 after huge Covid-driven growth in 2020, as well as increasing competition and lingering concerns about how production issues might affect the content slate.
But Anmuth remains a bull. “Netflix is a key beneficiary and driver of the ongoing disruption of linear TV, with the company’s content performing well globally and driving a virtuous circle of strong subscriber growth, more revenue, and growing profit,” he writes. “We expect Netflix to continue benefiting from the global proliferation of Internet-connected devices and increasing consumer preference for on-demand video consumption over the Internet, with Netflix approaching 300 million global paid subs by 2024.”
In another recent research note, Citi analyst Jason Bazinet advised investors that Disney rather than Netflix is the best bet on the future of subscription based video, Bazinet raised his target price on Netflix to $580 from $450. But he keeps his Neutral rating and thinks investors looking to bet on subscription-based video service invest in Disney instead.
“We prefer Disney for two reasons,” Bazinet writes in a research note. “First, as a late entrant, we think Disney has a quicker and easier path to sub growth over the next three years. Second, we suspect Netflix may have some hiccups over the next few quarters as price hikes potentially dampen quarterly net adds, tactically disappointing the Street. Disney, on the other hand, is apt to keep prices relatively stable.”
The analyst notes that Netflix has more content than Disney, and will likely outspend the Disney through 2024. But he notes that Disney’s content gets higher scores on both Rotten Tomatoes and IMDB than Netflix originals, and he notes that Disney has lower prices and flexible plans that allow bundling with Hulu and ESPN. He thinks Disney will pass Netflix in subscribers by 2023.
BAzinet also notes that Disney has an edge on Netflix when it comes to “Street narrative,” noting that price increases are likely to increase the volatility of Netflix shares. “We see lower risks for Disney, since ARPU (average revenue per user) and net adds will not be in tension,” he writes. “And, it is possible that Disney surprises to the upside (relative to its Investor Day sub outlook). That seems less likely to us at Netflix.”
On Friday, Netflix slipped 0.6%, to $497.98; the stock is down about 8% year to date.
Write to Eric J. Savitz at [email protected]
