Netflix Analysts Boost Stock Price Targets Despite Subscriber Shortfall

Netflix co-CEOs Ted Sarandos and Reed Hastings
Han Myung-Gu/WireImage

Netflix co-CEOs Ted Sarandos and Reed Hastings

"If this causes a dip, we would buy it," writes one Wall Street observer.

Global streaming giant Netflix may have added fewer subscribers during the third quarter than forecast after an early-year coronavirus pandemic-driven growth spurt, but several analysts on Wednesday raised their stock price targets on the company, telling investors to look beyond the quarterly figures.

Before Wednesday's stock market open, the stock was trading down 5.5 percent at $496.62 as of 8:25 a.m. ET.

BMO Capital Management analyst Daniel Salmon, who has an "outperform" rating on the stock, increased his stock price target from $625 to a Wall Street high of $700, touting, in his report's title, "The End of Free Cash Flow Losses."

Netflix, led by co-CEOs Reed Hastings and Ted Sarandos, has long reported such losses amid investment in original content and the like. Management on Tuesday forecast a 2021 free cash flow loss of up to $1 billion and, on the upside, a result as good as cash flow breakeven. But Salmon expects the firm to do better than that, saying: "Management wouldn't quite commit to it but we will: annual free cash flow losses are likely over." His conclusion from the latest results: "We recommend buying shares as the short-term focus on subs, which missed slightly, gives way to the reality of consistent free cash flow generation and the shift to questions about free cash flow uses."

Pivotal Research Group analyst Jeff Wlodarczak struck similar notes in his review of the latest results. "Netflix reported a solid essentially in-line third-quarter subscriber result and nicely better than expected financial results," he wrote. "2020’s sizeable free cash flow offers investors a glimpse at the inevitable future for Netflix – healthy material free cash flow growth – and helps squash the misplaced idea that Netflix is not fully capable of generating significant free cash flow."

He boosted his price target on Netflix's shares, which he rates at "buy," by $10 to $660, concluding: "We remain bulls on the Netflix story."

And Bernstein's Todd Juenger raised his price target on Netflix's stock, which he rates at "outperform," by $18 to $591. "If this causes a dip, we would buy it," he summarized in his report's headline.

The analyst called the subscriber shortfall "a small variance in a difficult-to-predict environment," adding that "compared to our model, it's about a wash." And he argued: "The second-half 2020 net adds deficit is offset by slightly higher net adds going forward and better free cash flow in the third quarter, 2020, and forward."

Concluded Juenger: "Those offsets are roughly value neutral to our ... target price, but we believe there is much greater chance of over-delivery versus under-delivery."

Meanwhile, Cowen's John Blackledge stuck to his "outperform" rating and $625 target stock price, noting that the fourth-quarter "sub guide of 6 million came in ahead [of expectations], helped by [a] robust originals slate."

Looking ahead, he added: "We view fourth-quarter earnings and first-quarter 2021 sub guide as the next catalyst, as well as any update on long-term margins beyond '20 or any pricing increases in one of the company's major markets."

MoffettNathanson's Michael Nathanson took a more cautious stance, highlighting that before the quarterly earnings update, Netflix's stock was up 60 percent for the year, but it will need a breather now. "This is the time for Netflix’s stock to chill," he wrote. "To be clear, we are not claiming Netflix has reached global maturity, and we still expect strong subscriber, revenue and earnings growth longer term. Our issue is the stock has clearly benefitted from COVID-related tailwinds, emerging as a winner among a tall pile of relative losers. That could all change in the final quarter of this tumultuous 2020 and into the early quarters of 2021 if some cyclicality impacts the market, breathing new life into the stocks weakened by the pandemic and the economy while perhaps hindering the winners’ upside during these unprecedented times." The analyst maintained his "neutral" rating on Netflix's stock with a price target of $420.

The team at Evercore ISI similarly maintained its "in line" rating on the stock with a $425 price target, writing: "The discussion now likely shifts to 2021 when year-over-year comparisons become more difficult. This is still a very compelling long-term growth story, but given our view that revenue looks set to decelerate for at least the next four quarters, we think outperformance from here could be challenging for a stock, which [has] already pricing in plenty of good news."

And Wedbush Securities analyst Michael Pachter, one of Wall Street's biggest Netflix bears, reiterated his "underperform" rating on the stock, but lifted his price target by $15 to $235, saying: "Turning the free cash flow corner warms us to the story."

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