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UBS analyst Eric Sheridan downgraded his rating on Netflix shares from “buy” to “neutral” in a Tuesday report titled “Pausing the Bingeing at These Levels.”
“For the second quarter in a row, we expect Netflix’s earnings report to demonstrate a widespread benefit as the COVID-19 environment continues to impact consumer behavior and consumption habits and user growth dynamics remain strong,” he explained. “Unlike prior periods over the last few months (with debates centered around competition with Disney, balance sheet versus free cash flow generation, content costs/competition), investor fears seem to have disappeared and the current stock price increasingly reflects many of the long-term business moat dynamics, including sustained growth in users/revenues.”
He maintained his $535 price target, writing: “Netflix’s long-term narratives remain intact but we would rather be constructive at levels when a mix of potential subscriber volatility, free cash flow dynamics and competition are better reflected in the share price.”
Sheridan raised his second-quarter global net subscriber add forecast from around 7.5 million to 9 million and his third-quarter estimate from 3.9 million to 5 million.
Meanwhile, Wedbush Securities analyst Michael Pachter had originally modeled 1.1 million U.S. and Canadian and 6.8 million international paid streaming subscriber net additions for the quarter ended June 30, but updated his estimates Tuesday.
“We expect significant upside to user growth driven by shelter-in-place and a solid slate of content releases, boosting gross subs adds and dampening churn,” he wrote. “Net subscriber additions in the quarter are likely to approach 15 million.”
He argued that the gains “may be sustainable, but they increase the urgency to create content” to retain users. “More consumption of content suggests even greater need to replace content with something new, and we expect spending and negative free cash flow to return to 2019 levels in 2021.”
Pachter raised his stock price target from $198 to $220, but reiterated his “underperform” rating.