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Slower subscriber growth is likely to keep a lid on Netflix’s stock until expected improved momentum in the final quarter of 2021 amid ramped-up new content comes into focus.
That was a key argument of Wall Street experts dissecting Netflix’s second-quarter results, including a subscriber drop in North America, and a weaker-than-expected user forecast for the current third quarter.
“Investors hoping for a resolution to the Netflix bull/bear debate (‘will subs growth return to prior normalized pace, e.g. 25-30 million net adds per year?’) are unlikely to find it in this earnings report,” highlighted Bernstein analyst Todd Juenger in a Wednesday note to investors, in which he maintained his “outperform” rating and $617 price target on the streaming giant’s stock. “The key near-term question hinges on the fourth quarter.”
The analyst noted that if management guidance for the third quarter does come true, “they will have averaged 27 million net adds per year for the past 24 months.” And fourth-quarter net adds of 8-9 million would put the company “back on that pace.” Concluded Juenger: “We forecast 9 million in the fourth-quarter base case, which we think favorably answers both the long-term sub potential and timing question.”
Wells Fargo analyst Steven Cahall echoed that Netflix’s latest results kicked the can down the road on investors’ debate about the health of the streamer’s medium-term subscriber momentum. “Just Wait for the Fourth Quarter,” was the title of his report. “Netflix investors are a bit skittish as the company works through the post-pandemic choppiness,” he wrote. “While management has guided to a modest sub accel from second quarter to third quarter, we think a record quarter for content in the fourth quarter will drive a steeper sub curve and re-catalyze the bull case.”
Cahall also highlighted new programming coming to Netflix. “Content is what drives subs, and we think second/third/fourth quarter content amortization is $2.8 billion/$3.3 billion/$4.2 billion, representing sequential growth of 4 percent/16 percent/27 percent. Our fourth-quarter amortization estimate indicates it’s the biggest content drop quarter on record.”
As a result, he trimmed his third-quarter subscriber net addition estimate from 5.5 million to 4.5 million but increased his fourth-quarter estimate from 8.4 million to 9.3 million. Maintaining his “overweight” rating, Cahall concluded: “We remain bulls with an unchanged $700 price target.”
Cowen analyst John Blackledge in his note also signaled that more fresh content was starting to return to the global streamer in the current quarter following the coronavirus pandemic. “The third-quarter originals slate includes returning seasons of global hit Money Heist (season 5), Biohackers (season 2) and Never Have I Ever (season 2), as well as new shows Young Royals and Once Upon a Crime,” he said. “Third-quarter original films include Gunpowder Milkshake (with Angela Bassett),Trollhunters (from Guillermo del Toro) and several documentary films, including Naomi Osaka, among others.”
Evercore ISI’s Mark Mahaney, who has an “outperform” rating on Netflix shares, lowered his earnings estimates and price target on Netflix shares from $655 to $635 following the latest results, noting: “Netflix posted mixed second-quarter results. … Third-quarter sub guide of 3.5 million net adds was below Street, but downside here had been broadly expected.”
However, he had a bullish conclusion: “These earnings per share results are likely the clearing event for Netflix shares — COVID comparisons now ease, COVID production challenges are hopefully over, sub adds will accelerate, and Netflix shares should surge.” Given his confidence of upside, Mahaney designated Netflix’s stock a “top 3 mega cap long, after Amazon and Uber.”
Guggenheim analyst Michael Morris focused on similar themes of the mid- to longer-term opportunity. Maintaining his “buy” rating and $600 price target on Netflix, he expects “optimism toward the fourth-quarter member growth opportunity to build, even as the near-term member growth debate continues.”
His report’s headline summarized his takeaways this way: “Bull Case Must Wait for Fourth-Quarter Content Slate.”
Meanwhile, MoffettNathanson’s Michael Nathanson maintained his “neutral” rating on Netflix and raised his target price by $5 to $465, but expressed concern about the company’s maturing North American business. “While clearly not in the bullish camp on this stock, our own 2025 earnings per share estimate of $26.50 is close enough to conventional wisdom to make us worried that we have become comfortably numb to recent data points,” he noted in his report entitled “What If Conventional Wisdom Is Wrong?”
He then pointed out that “year-to-date, post the great COVID-19 pandemic pull-forward, U.S./Canada has added only 15,000 net subscribers.” And Nathanson concluded: “It should be clear by now that the U.S. streaming market has become much more competitive over the past few years as new entrants and established players have prioritized streaming content while cutting subscription prices to attract new users. As such, while streaming as an industry is in structural growth mode, Netflix’s position as a first mover is clearly being challenged.”
Various analysts on Wednesday also chimed in on Netflix’s confirmation that it will add video games as additional offers without added cost for subscribers. “We view Netflix’s approach to gaming as a potential long-term revenue driver, particularly in mature markets,” Morris said.
Blackledge, who maintained his “outperform” rating and $650 price target, noted that second-quarter subscriber growth may have slowed, but “engagement was 17 percent higher versus the (pre-pandemic) second quarter of 2019, and churn was lower, underscoring the value proposition amid Netflix’s ongoing content investment.”
Meanwhile, BMO Capital Markets analyst Daniel Salmon, who has an “outperform” and $700 price target on the stock, wrote about the gaming strategy in a report entitled “Let the Games Begin!” “We’re cautiously optimistic for Netflix’s entry into video games, but expect it will be several years before success can be judged, barring a surprise hit game that can drive incremental subscribers,” he said.
Meanwhile, PP Foresight analyst Paolo Pescatore argued that gaming and other new service offerings are a natural evolution. “Whether Netflix likes it or not, the company must pivot towards being a platform,” he said. “It cannot solely rely on subscription video streaming while others offer a slew of services. Having a base of more than 209 million paying subscribers is effectively a shop window.”
As of 10 a.m. ET, Netflix shares were down 2.8 percent at $516.09.
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