Netflix Analysts Weigh in on Slower U.S. Growth, International Upside

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Netflix's 'House of Cards'

One observer says that increased near-term international growth “should more than offset concerns about approaching maturity in the U.S."

With Netflix reporting its latest financials and subscriber figures after the market close on Tuesday, Wall Street observers overnight updated their outlook for the streaming video giant.

One key theme in analyst reports was slowing U.S. subscriber growth and continued international momentum after the recent launch in 130 additional markets. Netflix CEO Reed Hastings on Tuesday acknowledged that U.S. growth was "harder than in the past," attributing it to the company’s already high penetration in its home market.

FBR & Co. analyst Barton Crockett on Wednesday cut his price target on the stock of Netflix, whose original series include House of Cards and Orange Is the New Black, by $13 to $125, but maintained his “outperform” rating.

“Netflix's fourth-quarter earnings report, post-close, had a Sybil-like split personality: encouraging upside in international sub growth but with a modest misfire in domestic sub growth,” he wrote. “While the international opportunity is larger than the U.S., we believe that the U.S. is the model of what is to come abroad, so clearer evidence of maturity in the U.S. is a slight net negative in that it weighs against blue-sky growth hopes abroad.”

“Plus, Netflix faces a debt-based financing need in tough credit markets — a slight, but more than negligible, risk at a time of financial market instability,” he added before highlighting: “We see enough growth to continue recommending Netflix, but with a lower price target.”

Looking at 2016, Crockett said that quarterly net sub growth in the U.S. was 18 percent lower than the year-ago period and that the company was guiding to a 23 percent year-over-year decline in domestic sub growth in the first quarter,” or 1.75 million net additions. International net sub adds grew 66 percent in the latest quarter, with 68 percent growth forecast for the first quarter, or 4.4 million net additions. “Spain, Portugal, Italy and Japan were basically new in the quarter,” explained Crockett. “In the first quarter, the lift from these countries continues, plus the 130 countries added in the rest-of-world launch.”

All this points to Netflix’s subscriber growth being near a peak, the analyst argued. “For four years, Netflix has grown subs domestically in the 5.5 million to 6.3 million per-year pace,” he said. “In 2016, however, this seems to be trending closer to 4 million. Our sense of international markets is that, in many, but not all, instances, the best growth is in the launch year. This argues that, internationally, we are probably near peak growth.”

Cowen & Co. analyst John Blackledge, who has an “outperform” rating on Netflix, raised his price target by $5 to $155. “Netflix reported solid fourth-quarter results as international net adds crushed consensus,” he said in raising his earnings forecasts for 2016-2021. “Netflix first-quarter U.S. sub guide was a bit lighter than expected, offset by significantly stronger international sub guidance.”

Credit Suisse analyst Stephen Ju on Wednesday maintained his “neutral” rating on Netflix shares, but raised his price target to $126 from $119.

He said he has boosted his 2016 adjusted earnings per share estimate to 48 cents from break-even “as we increase our international streaming subscriber growth forecast in tandem with lower content cost.” He added that increased international growth “should more than offset concerns about approaching maturity in the U.S.”

Macquarie Capital analyst Tim Nollen, who has a “neutral” rating on the stock, raised his target price from $113 to $120. “Netflix is in the process of creating a global Internet content powerhouse through its impressive international rollout,” he wrote. “But the near-term could be lumpy and the key to longer-term profitability lies in balancing sub additions and content costs in markets that may have very different dynamics than the U.S.”

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