Netflix Has Big Quarter, But Subscriber Momentum May Slow: Analysts React

Netflix co-CEOs Reed Hastings and Ted Sarandos.

A strong run this year has led the streamer to hit an all-time high of $575.37 on July 11, but some Wall Street observers say there is little upside left for now.

Netflix analysts had different views on the future of the company's stock after the streaming giant, in its late-Thursday second-quarter results, reported continued strong subscriber growth amid the novel coronavirus pandemic but warned of slowing momentum ahead.

The company added 10.09 million subscribers during its second quarter, bringing its global base to nearly 193 million after a record-breaking first quarter that saw it add 15.8 million.

Netflix, led by co-CEOs Reed Hastings and Ted Sarandos (whose promotion was unveiled Thursday), noted that July subscriber trends returned to year-over-year growth after flattening in June amid a peak in churn. But it forecast a third-quarter net gain of only 2.5 million subscribers, down from 6.8 million in the same period of 2019 and below analysts' estimate for nearly 5.3 million.

In early Friday trading, Netflix's stock was down 6.6 percent at $492.50.

Given the shares' strong run this year, which has led the streamer to hit an all-time high of $575.37 last Friday, some Wall Street observers argued after the quarterly update that there was little upside left for now, while others increased their stock price targets and urged investors to buy.

Evercore ISI analyst Lee Horowitz maintained his "in line" rating and $375 price target on Netflix's stock, arguing: "Sub trends disappoint relative to elevated expectations amidst exuberant expectations. … We struggle to find a clear catalyst to drive upward estimate revisions until later next year."

MoffettNathanson's Michael Moffett in a Friday report maintained his "neutral" rating on Netflix shares and highlighted this year's stock gains. "In early March 2020, Netflix was valued at around $370 per share. Almost 150 days later, the stock ended yesterday at $527 per share, which equates to an increase of market cap of over $70 billion," the analyst wrote before comparing that to the much smaller increase to his earnings estimate for 2022. "After factoring in all the moving pieces, our 2022 estimate for earnings before interest and taxes is now 5 percent higher than it was prior to the explosion of COVID-19."

Meanwhile, Guggenheim's Michael Morris was one of the analysts who raised his stock price target, from $500 to $530, following the quarterly update and forecast. "Management expects the '21 content slate to be even more robust than the '20 slate despite the likely impact of production delays on large scale programming during the first half of the year," he wrote in maintaining his "buy" rating. "Netflix continues to expand its lead as the premiere global video content creator and provider, and we expect the sustained financial benefits of this position to become increasingly evident over the next two years."

Pivotal Research Group analyst Jeffrey Wlodarczak, who has a "buy" on Netflix, raised his price target by $20 to $600, while Cowen's John Blackledge boosted his target on the stock, which he rates at "outperform," by $15 to $550. "The third-quarter guide implies a record for second/third quarter net adds, but may be conservative," he argued. 

And Sanford analyst Todd Juenger, who rates the stock an "outperform," boosted his target price by $69 to $573. "Our target price increase is mostly a result of incorporating lower interest rates," he explained.

BMO Capital Markets analyst Daniel Salmon also continues to recommend investors buy Netflix shares. He has an "outperform" rating and $625 target on them. "Once again, next quarter's guidance disappointed, and once again, we recommend buying the weakness," he wrote in his report. "The third-quarter guide comes in the face of a historically strong first-half sub additions; we expect price increases [in international markets] to pick up in the second half; and guidance for flat to positive free cash flow in 2020 gives us increased confidence in a consistent turn beginning in 2022."