The Ratings Game: Netflix coronavirus subscription boom may be ‘as good as it gets,’ stock sinks
The Ratings Game
Record subscriber gains overshadowed by fear of a weaker second half once lockdown orders are lifted
Netflix Inc.’s blowout quarterly results haven’t been greeted with too much enthusiasm from investors amid concerns that the company will have trouble keeping up the wave of good news after getting a big initial bump due to global lockdown orders.
Even as the company posted paid subscriber gains of 15.8 million, a record quarterly total according to FactSet, some analysts cautioned that things could get tougher from here for the streaming giant. Shares
are down 1.1% in morning trading Wednesday. They initially surged in after-hours trading before pulling back.
“While the timing of a potential return to normalcy remains unknown, we expect some form of trend reversal to materialize as lockdowns are lifted and a portion of recent demand proves to have been pulled forward,” wrote Stifel’s Scott Devitt, who cut his rating on the stock to hold from buy in a note titled: “As Good As It Gets.”
He said that Netflix’s management also expects a drop in viewership and subscriber growth once people are more freely able to leave their homes, which could pressure numbers in the latter part of the year especially as executives say there is a lot of “guesswork” behind their forward-looking models.
Devitt raised his price target to $460 from $440 in conjunction with the downgrade.
Evercore ISI analyst Lee Horowitz argued that the company’s commentary “likely solidif[ied] 2020 as peak net additions for the service” as management called for lower net additions than last year during the second half of 2020.
“As good as 1H trends appear to be for the company in the midst of the coronavirus pandemic, a slightly more cautious tone was indicated for the back half of the year, as some COVID-related pull-forward begins to bleed off and as tougher content compares potentially weigh on 2H growth,” he wrote. “This lumpy full-year view likely leaves momentum-oriented investors wondering how much more upside remains from here.”
Horowitz reiterated an in-line view of the stock while raising his target price to $375 from $350.
The results were enough to earn Netflix shares an upgrade at Wells Fargo, but it wasn’t exactly a rousing endorsement.
“Netflix undoubtedly works fantastically when net adds are strong, but it’s unproven when they decel[erate],” wrote Wells Fargo’s Steven Cahall, who upped his rating to equal weight from underweight. He said that his long-term concerns about the company’s ability to generate cash “frankly…are a bull market luxury” at a time when Netflix is proving its value to even more consumers during an unprecedented crisis.
Still, Cahall is more muted on his outlook for Netflix’s stock, while raising his price target to $460 from $305. “Recall that Disney was a value-trap after Disney+ subs ran real far real fast,” he wrote. Another concern is that the company’s 2021 content slate could be impacted by production halts in Hollywood.
For Needham’s Laura Martin, the stock-price reaction after earnings prompted questions about whether Netflix is really a growth stock.
“How many growth stocks can you think of where reported subs are double the consensus estimate and yet the shares don’t move after-hours?” Martin asked. “We can’t think of many.”
She reiterated her underperform rating on the stock while arguing that Netflix’s rally in the lead-up to earnings had already captured the potential for a big coronavirus-induced subscriber boost, even if the company’s numbers came in at nearly double what analysts had been predicting.
Others were more upbeat. “We believe for Netflix this is the best possible shape of the subscriber growth: to have attracted a big population of new users to the service, with churn kept near its structurally lowest possible rates,” wrote Bernstein’s Todd Juenger, who thinks few people will end up leaving Netflix’s service after trying it out during this period.
He rates the stock at outperform and increased his price target to $504 from $487.
Of the 42 analysts tracked by FactSet who cover Netflix’s stock, 28 rate it a buy, nine rate it a hold, and five rate it a sell, with an average price target of $448.31. At least 17 analysts raised their price targets after the report, according to FactSet.
Netflix shares have increased 31% over the past three month as the S&P 500
has declined 19%.