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Netflix Inc. talked up the long game even as it warned that subscriber growth could slow in the second half of the year, sending shares down more than 6% in Friday trading.
Netflix NFLX, -7.12% on Thursday reported 10.1 million new subscribers in the second quarter, topping the 10 million mark for a second consecutive quarter amid shelter-in-place orders related to the COVID-19 pandemic.
Chief Executive Reed Hastings spoke about “the next decade of Netflix growth” as he announced content chief Ted Sarandos would be joining him as co-CEO. The company will continue its international push while focusing on making content discovery even smarter.
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“The opportunity across the next decade is just amazing for us, Hastings said. At the same time, the company admitted that subscriber growth had been pulled forward to the first half of 2020 due to the pandemic, which could pressure results for the next few quarters.
Analysts were divided on the future prospects for Netflix shares NFLX, -7.12%, especially with growth set to slow for the time being.
“Perhaps as revenues start to decelerate off a large base, the market will likely start focusing on some non-subscriber metrics like operating profits and free cash flow growth,” wrote MoffettNathanson analyst Michael Nathanson, who has a neutral rating and $390 target price on the shares, up from $372 previously. “If so, although this has always been our focus, moving away from a simple revenue narrative will pull Netflix into broader comparative analysis with a larger universe of companies like Alphabet GOOG, -0.89% GOOGL, -0.75% and Facebook FB, -0.59% that just offer much better relative valuation bets.”
Credit Suisse analyst Douglas Mitchelson sees “a lack of near-term catalysts,” which prompted his downgrade of Netflix shares to neutral from outperform late Thursday.
“Our long-term view of Netflix as the clear global subscription streaming leader is unchanged, but to shift the valuation paradigm from these levels would require, in our view, investors: (1) adding mobile to [the total addressable market]; (2) assuming Netflix will be able to bundle and sell more products with its service; or (3) anticipating robust [free-cash flow] and its deployment,” he wrote.
Needham’s Laura Martin asked “How does it get any better for NFLX?” after a quarter in which the company faced no competition from live sports, theaters, and more.
“We believe Netflix valuations have downside risk if/when Netflix adds return to a more normalized trend line,” wrote Martin, who continues to rate the shares at underperform.
Others were more forgiving. Morgan Stanley’s Benjamin Swinburne was encouraged that churn is still down at Netflix even though many countries have begun allowing people to do more activities outside the home. He also likes that engagement is still above pre-pandemic levels, suggesting Netflix might have room to increase prices earlier than he initially expected.
“Finally, with the majority of Netflix’s production occurring outside the U.S. combined with massive efforts to re-imagine production in a post-COVID world and selectively acquiring third party content, 2021 original deliveries should be higher than 2020 for the year and in each individual quarter,” Swinburne wrote. The first half of 2021 might face tough comparisons, but the second half should bring a stronger content slate than what will be seen this year, he added.
Swinburne rates the stock at outperform and he upped his price target to $600 from $575.
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Jefferies analyst Alex Giaimo wrote that while production cuts halts will hurt next year’s first-half content slate, that’s a problem for all media companies and Netflix seems better positioned than others because the traditional networks often have shorter lead times.
“While the stock ran a bit faster than near-term fundamentals could support, let’s not lose sight of the fact that Netflix just added ~26 million subscribers in six months,” wrote Giaimo, who has a buy rating and $550 price target on Netflix’s stock, up from a prior $520. “Subscriber growth will slow significantly in 2H20, but cash in the door now is better than cash in the door three months from now.”
Of the 41 analysts tracked by FactSet who cover Netflix shares, 24 have buy ratings, 12 have hold ratings, and five have sell ratings, with an average price target of $510. At least 16 analysts raised their price targets on Netflix’s stock after the report, while one lowered his, according to FactSet.
Shares have gained 16% over the past three months as the S&P 500 SPX, +0.12% has risen 12%.
