Netflix reports earnings next week on April 20.
Liam Daniel/Netflix
When Netflix reported its fourth-quarter results back in January, the streaming video giant’s stock spiked higher. The big news was that Netflix expects to operate at cash-flow breakeven or better, and could eventually start buying back stock.
The company also said it shouldn’t ever have to tap the debt markets again to fund content production, putting the kibosh on the bearish argument that Netflix could never generate enough subscription revenue to fund its operations. And on Jan. 20, the day after Netflix (ticker: NFLX) reported fourth-quarter earnings, the stock set an intraday record at $593.29.
But it has been all downhill from there. Netflix saw a clear boost to its business from the pandemic, with most movie theaters, bars, and sporting events shuttered—it was the ultimate stay-at-home stock. Now with vaccination rates rising, investors are hunting for re-opening plays and taking profits on the 2020 winners. And there are concerns that Netflix could see slower growth and higher churn as consumers get off their couches and go outside.
Netflix will report March quarter results on April 20. The company has projected $7.1 billion in revenue, earnings of $2.97 a share, and 6 million net new subscribers. Some investors worry that a combination of a growing array of subscription streaming video services and tough comparisons with 2020 will lead to some difficult quarters in 2021. We should get some new clues next week.
Nonetheless, some analysts are staying bullish on the company.
On Wednesday, Morgan Stanley analyst Benjamin Swinburne repeated his Overweight rating and $700 price target on Netflix shares. He notes that the stock sits about where it was in July 2020, with investors “bracing for the ultimate in tough Covid comps.” But Swinburne remains optimistic. He says three factors should drive up earnings from here: “a long runway for member growth,” pricing power, and a vertically integrated motel with a focus on original content.
Swinburne concedes that there are some risks to subscriber growth in the 2021 firsts half, but he sees net additions increasing in the second half and into 2022. The analyst notes that Netflix has less than 10% of the global subscription video market.
The list of new entrants in the streaming world since late 2019 is long—with new services from Apple (AAPL), Walt Disney (DIS), HBO, Comcast (CMCSA), Discovery, and ViacomCBS (VIAC). Yet in the same period those services were introduced, Netflix reported the strongest net subscriber gains of any period in its history.
Swinburne reports that a key part of his thesis is that the company can become more profitable over time, eventually reaching 40% Ebitda (earnings before interest, taxes, depreciation, and amortization) margins, with gross margins expanding to an eventual 60% from 40% in 2020.
Meanwhile, KeyBanc Capital Markets analyst Justin Patterson reiterated his Overweight rating and $650 price target, in a note more focused on the coming quarterly report. Patterson sees multiple catalysts for the stack coming in the second half.
For one thing, he sees important new content on the way, including new seasons of the popular series Stranger Things and Money Heist. The company’s tests on cracking down on password sharing could boost subscriber growth as well, he says. And Patterson is impressed with the company’s continued aggressive stance on paying up for content, including a new licensing deal for Sony feature films and a $450 million investment in sequels to the hit film Knives Out.
On Wednesday, Netflix shares were off 2.1% to $541.95.
Write to Eric J. Savitz at [email protected]
