Shares of Netflix (NFLX) are under pressure on Thursday after the streaming giant reported disappointing quarterly results, with second quarter net subscriber additions missing the estimates of the company and of Wall Street. While several analysts cut their price targets on the shares following the news, there were no cuts to their ratings on the stock. Citing a "stronger slate," Pivotal Research analyst Jeffrey Wlodarczak said he expects a subscriber rebound in the third quarter, an opinion shared by his peers at Oppenheimer and SunTrust.
QUARTERLY RESULTS: On Wednesday after market close, Netflix reported second quarter earnings per share of 60c and revenue of $4.92B, with consensus at 56c and $4.93B, respectively. For the third quarter, the company said it sees earnings per share of $1.04 and revenue of $5.25B, both in-line with expectations, and streaming paid net additions of 7M. "While our U.S. paid membership was essentially flat in Q2, we expect it to return to more typical growth in Q3, and are seeing that in these early weeks of Q3. We forecast Q3 global paid net adds of 7M, up versus 6.1M in Q3 2018, with 0.8M in the U.S. and 6.2M internationally," Netflix said. Considerably below Wall Street expectations, the company reported second quarter streaming paid net additions of 2.7M members, "less than the 5.5M in Q2 a year ago and our 5.0M forecast. The company noted that it thinks Q2's "content slate drove less growth in paid net adds than we anticipated. […] Q3 has started with Stranger Things season 3, and the first two weeks of Q3 are strong."
THIRD QUARTER REBOUND: In a post-earnings research note, Pivotal Research’s Wlodarczak raised his price target on Netflix to $515 from $500 and kept his Buy rating, saying investors should not make "a mountain out of a molehill." The analyst believes the second quarter’s below-consensus subscriber count was driven by a materially larger subscriber base and a "less impactful" content slate, but also noted that the company's "healthy price increase" resulted in better than expected financial results. Wlodarczak added that a stronger slate and disappearance of a price hike related churn in the third quarter are expected to generate a rebound in subscriber growth for Netflix during the back half of 2019.
Voicing a similar opinion, Oppenheimer analyst Jason Helfstein reiterated an Outperform rating and a $410 price target on Netflix's shares. The analyst noted that third quarter global net add guidance is 11% above the Street, on stronger content releases, which should offset second quarter concerns. Additionally, fiscal year margin outlook is unchanged, and free cash flow losses are expected to moderate in 2020, he contended. Overall, Helfstein still sees Netflix on track to garner material growth in global broadband homes. SunTrust analyst Matthew Thornton also reiterated a Buy rating and $402 price target on Netflix, pointing out that the past precedent of the second half rebound in 2016 and 2018 has shown that the company can bounce back. The analyst also highlighted the "most robust to date" content slate expected for the third quarter and abating price increase headwinds.
TARGETS CUT: Keeping an Overweight rating on the shares, JPMorgan analyst Doug Anmuth lowered his price target for Netflix to $425 from $450. The analyst acknowledged that the second quarter net adds miss was meaningful, but noted that the company's results are often volatile and the quarter contained a number of moving pieces. Netflix's back half of the year content slate is strong and the company is seeing significantly better trends quarter-to-date, the analyst contended.
Also reiterating an Outperform rating on the stock, BMO Capital analyst Daniel Salmon lowered his price target for Netflix to $440 from $470. Given the sequential decline in its U.S. markets and the approaching launch of Disney+ (DIS), the analyst contended that this may be a "more than just the usual" earnings-miss driven debate. Longer-term however, Salmon believes the company's revenue trend remains on track, and recommends Netflix, Amazon (AMZN), and Disney as a "collective investment" in the global streaming race.
Meanwhile, Goldman Sachs analyst Heath Terry lowered his price target for Netflix to $420 from $460, keeping a Conviction Buy rating on the shares. A lighter content slate mixed with modestly higher churn in markets impacted by recent price increases drove the subscriber miss, he contended. The analyst expects the benefits from substantially higher content spend over the back half of the year will drive higher global net adds relative to the second half of 2018. Moreover, Terry continues to believe shares of Netflix will "significantly outperform" as its content investments, distribution partnerships and marketing spend drive subscriber growth "significantly above" consensus expectations.
While Netflix shares may be range bound until the company reports third quarter earnings following its miss on domestic and international paid net subscriber adds guidance, Stifel analyst Scott Devitt believes management's explanations for the current quarter miss "appear reasonable." Devitt lowered his price target on Netflix shares to $400 from $425, but kept a Buy rating on the stock.
SUBSTANTIAL CASH BURN FOR MANY YEARS: Bearish on Netflix, Wedbush analyst Michael Pachter reiterated an Underperform rating on the stock but raised his price target on the shares to $188 from $183. The analyst told investors that he expects content spending to trigger substantial cash burn for many years, and notwithstanding four Netflix price increases in the last five years, he noted that cash burn continues to grow. Content migration and price hikes could cause a deceleration in subscriber growth, and consistently negative free cash flow makes DCF valuation impossible, he added.
PRICE ACTION: In morning trading, shares of Netflix have plunged almost 11% to $324.13.
