Netflix added 8.76M paying global subscribers during the fourth quarter, more than the 7.6M the company had forecast
Shares of Netflix (NFLX) are slipping on Wednesday after the company reported quarterly results last night. While Netflix beat on the top and bottom lines, the streaming giant gave disappointing guidance for the first quarter. Additionally, the company acknowledged increased competition in the U.S. that should become more intense globally after the Disney+ (DIS) service launches across Europe in March.
RESULTS: After market close on Tuesday, Netflix reported fourth quarter earnings per share of $1.30 and revenue of $5.47B, both above consensus of 53c and $5.45B, respectively. The company also reported fourth quarter streaming paid net additions of 8.76M members. "Global paid net additions totaled 8.8M in Q4, on par with the 8.8M in the prior year period and ahead of our forecast of 7.6M, fueled by our broad slate of original programming and the worldwide adoption of streaming video," Netflix said. The company also reported U.S. and Canada paid subscriber additions of 550,000, less than the expected 589,000. For the first quarter, the streaming giant sees earnings per share of $1.66 and revenue of $5.73B, with consensus estimates at $1.19 and $5.76B, respectively. Netflix also sees first quarter streaming paid net additions of 7.0M members versus 9.6M in the first quarter of 2019, and is targeting a 16% operating margin in 2020.
Regarding competition, Netflix said in its quarterly letter to investors: "Many media companies and tech giants are launching streaming services, reinforcing the major trend of the transition from linear to streaming entertainment. This is happening all over the world and is still in its early stages, leaving ample room for many services to grow as linear TV wanes. We have a big head start in streaming and will work to build on that by focusing on the same thing we have focused on for the past 22 years - pleasing members. As an example, in Q4, despite the big debut of Disney+ and the launch of Apple TV+ [AAPL], our viewing per membership grew both globally and in the US on a year over year basis, consistent with recent quarters."
BULLISH TAKES: RBC Capital analyst Mark Mahaney kept his Outperform rating and $420 price target on Netflix after its fourth quarter results, saying the fundamentals were "strong." The analyst noted that the better than expected subscriber adds were driven by record numbers in Latin America and APAC, adding that while the outlook was light, seasonality discussed by the management implies some improvement coming in the second quarter.
Also bullish on the stock, Piper Sandler analyst Michael Olson reiterated an Overweight rating and $400 price target for Netflix saying the company reported better than expected subscriber additions for the fourth quarter, while offering a below consensus, "and likely conservative," first quarter outlook for revenue and subscribers. Despite the launch of new streaming services, Olson believes Netflix continues to capture a significant portion of traditional content dollars as it migrates to streaming.
Commenting on Netflix's quarterly results, Credit Suisse analyst Douglas Mitchelson added that the fourth quarter was likely the toughest competitive launch Netflix will face by far, and the U.S. miss was small relative to Disney+ skyrocketing to a well-ahead-of-expected 20M subscribers right out of the gates. Overall, while the analyst does not expect a strong follow-through for Netflix shares on the quarterly results, he believes the set-up is now "quite favorable" for Netflix heading into 2020. He has an Outperform rating and $440 price target on Netflix's shares.
Meanwhile, Oppenheimer analyst Jason Helfstein raised his price target for Netflix to $400 from $385 as fourth quarter international subscriptions drove upside, which should create enough buffer in 2020 against new competitor launches in the US. While the fourth quarter U.S./Canada net adds were modestly lower than expected, the miss was too small to matter, he contended. More important, Helfstein highlighted that fiscal year 2020 subscriber cadence should be similar to fiscal year 2018, suggesting a more even launch schedule and implying that new content volume has reached a sustainable level. He has an Outperform rating on the shares.
BEARISH TAKES: Still bearish on Netflix, Wells Fargo analyst Steven Cahall maintained an Underweight and a $265 price target on the shares following quarterly results. While the subscriber growth is "impressive," the cost to grow is what he thinks investors should be watching. If subscriber growth falters, the focus will quickly shift to profitability and second quarter tends to be seasonally weakest for subscribers, with this year including launches like Peacock (CMCSA) and HBO Max (T), and Disney elsewhere, he added. Cahall still thinks a tempering of expectations in 2020 could make Netflix a "tough stock."
Also keeping an Underperform rating on the shares, Needham analyst Laura Martin noted that the company's U.S. subscriber net adds of 402K - below the guided 600K - were more troubling than they appear. While the company cited 2019's price increases and churn in homes with children, the quarter had a strong slate of content with 8 films with 24 Academy Award nominations as well as the price competition with Disney+ only coming in December, since that offering was free for the first 30 days, she contended. Martin added that the company's international growth also has some issues, since U.S. subscribers have historically been 3-times more profitable than its international ones.
Meanwhile, Wedbush analyst Michael Pachter lowered his price target for Netflix to $173 from $188, while maintaining an Underperform rating on the shares. The analyst noted that top-line results were modestly above expectations while profitability was generally below, notwithstanding a one-time tax adjustment. Pachter expects content spending to trigger substantial cash burn for many years. Content migration to competing services and price hikes may slow subscriber growth and consistently negative free cash flow makes DCF valuation speculative, he added.
PRICE ACTION: In morning trading, shares of Netflix have declined about 2% to $331.96.