Along with earnings and subscriber figures, Netflix also announced a proposed $1B offering of senior notes
Shares of Netflix (NFLX) are under pressure on Wednesday following quarterly results. While the streaming company reported a big jump in subscribers amid the COVID-19 pandemic, Netflix also said that given the uncertainty on home confinement timing, predicting future subscriber growth was "mostly guesswork." Both Raymond James and Stifel analysts downgraded the stock after the announcement, with the latter saying that he feels now is "as good as it gets" for Netflix. Meanwhile, Wells Fargo analyst Steven Cahall upgraded the stock to Equal Weight, arguing that "as long as hand sanitizer is sold out," Netflix should outperform.
RESULTS: On Tuesday after market close, Netflix reported first quarter earnings per share of $1.57 and revenue of $5.77B, with consensus at $1.65 and $5.76B, respectively. The company also reported global streaming paid net additions of 15.77M for the quarter. In its quarterly letter to investors, Netflix noted that, "First, our membership growth has temporarily accelerated due to home confinement. Second, our international revenue will be less than previously forecast due to the dollar rising sharply. Third, due to the production shutdown, some cash spending on content will be delayed, improving our free cash flow, and some title releases will be delayed, typically by a quarter."
For the second quarter, the streaming company sees earnings per share of $1.81 and revenue of $6.05B, with consensus at $1.54 and $5.97B, respectively. "Hopefully, progress against the virus will allow governments to lift the home confinement soon. As that happens, we expect viewing and growth to decline. Our internal forecast and guidance is for 7.5 million global paid net additions in Q2. Given the uncertainty on home confinement timing, this is mostly guesswork. The actual Q2 numbers could end up well below or well above that, depending on many factors including when people can go back to their social lives in various countries and how much people take a break from television after the lockdown. […] we currently guess that Q3'20 and Q4'20 will have lower net additions than last year due to these effects."
SUBSCRIBER GROWTH 'AS GOOD AS IT GETS': Raymond James analyst Justin Patterson downgraded Netflix to Outperform from Strong Buy with a price target of $480, up from $415, saying the company is off to a "phenomenal" start in 2020 and is on pace for 23M paid net adds in the first half of 2020. However, while he continues to view Netflix as a long-term winner in Direct-To-Consumer video, Patterson believes the potential for positive estimate revisions and multiple expansion are limited until he observes post-COVID-19 retention rates.
Meanwhile, Stifel analyst Scott Devitt also downgraded Netflix to Hold from Buy with a price target of $460, up from $440. The analyst noted that the company reported meaningfully higher paid subscriber growth in the first quarter as global lock-downs and social distancing measures have accelerated demand for in-home entertainment. However, "some form of trend reversal" will materialize as lock-downs are lifted and a portion of recent demand proves to have been pulled forward, the analyst contended. As such, Devitt feels now is "as good as it gets" for Netflix and sees a more balanced risk/reward profile at current share levels.
UNIQUE VALUE IN UNIQUE TIMES: While saying that the company's quarterly results demonstrate the unique value of Netflix in these even more unique times, Wells Fargo analyst Steven Cahall upgraded the stock to Equal Weight from Underweight with a price target of $460, up from $305. Cahall argued that "as long as hand sanitizer is sold out," Netflix should outperform, and called its execution "outstanding." However, the analyst does not think Netflix is risk-free for 2020 as the first half of the year strength could mean second half of 2020 net adds are down year over year, with management suggesting light adds in the third and fourth quarters.
GROWTH ACCELERATION LIKELY TO CONTINUE: More bullish on the stock, Goldman Sachs analyst Heath Terry raised his price target for Netflix to $540 from $490, while keeping a Conviction Buy rating on the shares. The growth acceleration seen in the first quarter is likely to continue, Terry told investors in a research note. While management suggested the Q1 outperformance was a function of subscribers being pulled forward and that net adds in the second half would be down versus the prior year, the analyst believes this is likely to prove "overly conservative" given the network effect of additional subscribers. Terry revised Netflix's estimates to reflect faster subscriber growth expectations.
Also maintaining Buy-equivalent ratings on the stock, Pivotal Research, Piper Sandler, JPMorgan, Credit Suisse, Canaccord, Oppenheimer, Deutsche Bank and Cowen raised their prices targets for Netflix.
WHAT'S NOTABLE: On Wednesday, Netflix announced that it intends to offer, subject to market and other considerations, approximately $1B aggregate principal amount of U.S. dollar denominated and euro denominated senior unsecured notes in two series through an offering to persons reasonably believed to be qualified institutional buyers, and outside the United States to non-U.S. persons pursuant to Regulation S under the Securities Act. The interest rate, redemption provisions, maturity date and other terms of each series of Notes will be determined by negotiations between Netflix and the initial purchasers.
PRICE ACTION: In morning trading, shares of Netflix have dropped about 2% to $425.56.