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Netflix Shares Dip On Subscriber Slowdown, But Wall Street Bulls Still Buy The Story

Dade Hayes
·3 min read

Netflix shares slipped 6% in early trading today after the company reported a slowdown in subscriber growth and results that fell short of expectations.

At about $492, the stock fell below the $500 mark for the first time since September 30. After the close of trading Tuesday, the company reported adding 2.2 million global subscribers, which was below its own forecast. Earnings per share of $1.74 also missed the company’s guidance. The consensus for both metrics among Wall Street analysts was higher, with some expecting more than 5 million new customers.

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Despite the miss, several analysts reaffirmed their positive rating on the stock and some even bumped up their 12-month price targets.

Benjamin Swinburne of Morgan Stanley has an “overweight” on the shares and raised his price target to $640 from $630, primarily due to the company’s achievement of positive cash flow after years in negative territory. “COVID has impacted Netflix’s results in two primary ways this year — more revenue and less spending,” he wrote in a note to clients, saying recent results have been “reinforcing our conviction in the long-term free cash flow opportunity in this business.”

CFO Spencer Neumann said during the company’s earnings interview Tuesday that the company expects to report positive cash flow of about $2 billion for the full year in 2020 and an operating margin of 19%. In 2021, cash flow could dip into the red as production ramps back up, but Neumann expressed confidence in the company’s ability to retain ample cash. If so, that trajectory would rebut a key criticism from bears that Netflix was on a path to eventually spend its way into oblivion.

Todd Juenger of Bernstein Research hiked his 12-month price target to $591 from $573. He sees the company as well-positioned to continue thriving as COVID-19 lingers well into 2021. “We believe the pandemic impact is more likely to last longer than expected, rather than shorter,” he wrote in a note to clients. “This would simultaneously increase consumer demand for streaming video (stay-at-home) and decrease available content on competing services (production shutdown).”

Guggenheim’s Michael Morris, who has a “buy” and a price target of $570, pointed to India and the Asia-Pacific region as encouraging growth areas. ” International growth, particularly in high-growth, mobile-centric markets, remain fundamental to the Netflix bull case,” he wrote in a research note, “with local partnerships as a key driver. In 3Q, Netflix localized its service to support Hindi within its user interface and launched a partnership with India’s largest mobile-operator, Reliance-Jio, to bundle mobile and fiber
broadband plans and integrate Jio set top boxes.”

Jeffrey Wlodarczak of Pivotal Research maintains one of the highest price targets on Wall Street for Netflix and he raised it another $10 to $660 after the quarterly numbers. The company benefits from a “virtuous cycle,” he wrote in a note to clients, with its revenue growing as subscriber numbers rise, which then enables it to invest in content, which in turn attracts new subscribers.

Competition in streaming is not a concern for Wlodarczak. He views Disney+ as complementary to Netflix. Among the other new challengers, he doesn’t see HBO Max as a threat. “There is a reasonable shot that AT&T management will screw up HBO (in similar fashion to DIRECTV) as a competitor,” he wrote.