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With Netflix reporting better-than-expected third-quarter subscriber growth late on Tuesday and forecasting stronger fourth-quarter momentum, analysts are updating their views on the streaming giant’s outlook. But after a recent stock bounce thanks to optimism that subscriber momentum was improving, thanks also to Squid Game, investors seemed to change tack and be happy to play the waiting game.
After all, Netflix shares dropped slightly in early Wednesday trading, trending down 1.2 percent at $631.11 shortly after 10 a.m ET.
Many on Wall Street liked what they saw and heard in the earnings update, and several analysts lifted their stock price targets. And the stock had recorded strong gains as of late to hit an all-time high earlier in October as investor sentiment turned more positive and the global success of South Korean series Squid Game drew positive headlines. With that momentum in mind, the latest set of results seemed to confirm, but not fundamentally change, analysts’ or investors’ basic takes on the streamer’s outlook.
“We saw implied investor enthusiasm as high (going) into the report and feel that results generally met rather than beat expectations,” Guggenheim analyst Michael Morris wrote in a report.
Evercore ISI analyst Mark Mahaney also noted one possible concern that could affect the stock reaction. “We believe the market might be a bit disappointed that the fourth-quarter net adds guide wasn’t above the Street,” Mahaney wrote. “But we would note that the fourth quarter is typically one of Netflix’s seasonally strongest quarters and the one quarter of the year where the company has consistently (beaten) its net adds guidance – every year since 2016. Given the very robust strength of the fourth-quarter content slate and the tailwind created by Squid Game, we suspect that Netflix will continue this streak in 2021, further boosting share price performance.”
Netflix added 4.4 million new subscribers in the third quarter, beating its own target of 3.5 million, to reach 214 million overall. For the current fourth quarter, it projected it would add 8.5 million users, in line with its growth during the same period in 2020 and the Wall Street consensus, but down slightly from nearly 8.8 million in the final quarter of 2019.
Mahaney reiterated his “outperform” rating, while raising his 2021 subscriber growth estimate by 2 million to 18 million. In turn, he boosted his price target on the stock by $15 to $710. “This was a solid report card against very elevated expectations, and we came away incrementally more constructive on the strength of the content slate for the fourth quarter and into 2022,” the analyst summarized in his report entitled “Green Light!”
Morris, who has a “buy” rating on Netflix, also raised his stock price target, in his case by $35 to $720. He noted that management’s fourth-quarter subscriber growth guidance came in below his 9.0 million expectation, but also emphasized that given the third-quarter upside surprise, “total second-half implied net adds of 12.9 million (are) ahead of our prior 12.5 million.”
And Morris highlighted a strong pipeline of series and films. “Importantly, the reignited post-COVID content production cycle is filling the release slate, yielding direct member trend results,” Morris argued. “We continue to see steady progress on sustainable, long-term growth initiatives, primarily industry-leading global content sourcing and streaming delivery experience, and new opportunities (mobile plans, gaming and consumer products).”
He summarized his takeaways in the title of his report this way: “Content-Driven Reacceleration Lives Up to Billing, Underpins Sustained Multi-Year Growth Outlook.”
An even bigger price target boost of $50 to $750 came from Pivotal Research Group analyst Jeff Wlodarczak who has a “buy” rating on the stock. “The release of significant new content in the second half drove a nice acceleration in third-quarter subscriber results ahead of expectation,” he wrote in an investor note. “Netflix continues to have a multi-year head start on its peers with a broad focus across most demographics and we believe still significant global subscriber/average revenue per user growth opportunities.”
Cowen analyst John Blackledge told investors he has “slightly raised [his] long-term forecast” for Netflix as a result of the latest results, but boosted his stock price target much more significantly – from $650 to $750, maintaining his “outperform” rating. Like others, he highlighted “an extremely strong film and episodic content slate” this quarter.
BMO Capital Markets analyst Daniel Salmon said the company’s fourth-quarter subscriber forecast came in “below our prior 9.033 million” estimate, which he has now cut to 8.5 million. In a nod to the Asia-Pacific region being the largest contributor to Netflix’s third-quarter subscriber growth, he also updated his growth projections for the coming years. “Net subscriber additions decline … with stronger growth in Asia-Pacific more than offset by slower growth in the more mature U.S./Canada and Latin America,” Salmon explained. And he “slightly” lowered his 2022 and 2023 estimates for average revenue per user “to reflect more conservative price increases near term, while raising estimates thereafter as we expect video gaming to begin contributing to pricing power.”
Overall, Salmon stuck to his “outperform” rating and $700 price target on Netflix shares though and joined his peers in lauding its programming pipeline. In his report entitled “Squid Game Leads Strong Content Slate Into First Half of 2022,” he concluded: “The slate in the fourth quarter 2021 and first half 2022 is particularly strong, including the return of La Casa de Papel (aka Money Heist), The Witcher, You, Tiger King and Cobra Kai, as well as new movies Red Notice, Don’t Look Up and The Unforgivable etc.”
PP Foresight analyst Paolo Pescatore emphasized the importance of maintaining a steady flow of appealing fare amid increased streaming competition. “It feels like the company is returning back to its normal cycle following the streaming pandemic party,” he said. “Netflix remains a robust business and will continue to invest heavily in original content which remains paramount. … Netflix remains successful due to unique storytelling that resonates with audiences around the world.”
However, since the debut of Dave Chappelle: The Closer on Oct. 5, the streaming giant has also been at the center of a controversy over multiple remarks made by Chappelle in the stand-up special that mocked gender identities and Netflix co-CEO Ted Sarandos’ defense of the special in staff memos.
“I screwed up” with the memos, Sarandos told The Hollywood Reporter on Tuesday, but added that “my stance hasn’t changed.” The topic did not feature on the earnings call or in most analyst notes.
MoffettNathanson analyst Michael Nathanson mentioned Chappelle in passing though when he argued that the global streamer doesn’t focus its content creation efforts on big stars, creators or other likely sources of success as much as its entertainment industry rivals. “Sure, Netflix seeks Positions of Maximum Opportunity in the hiring of a Shonda Rhimes or Ryan Murphy to run shows or the commissioning of The Crown or a Dave Chappelle special,” he said. “However, the truly breakthrough content like Squid Game or The Queen’s Gambit or Money Heist feels unexpected and is the outcrop of Netflix’s willingness and ability to just spend, baby, spend on new content. Sub growth only appears to be sustained by new content spending.”
Based on the company’s latest earnings report, the analyst pushed his target price $5 higher to $470, but maintained his “neutral” rating on Netflix. Explained Nathanson: “Given the in-line subscriber guidance and margins likely slowing into next year, we don’t think the upside from Squid Game warrants the recent run in the stock.”
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