Shares of Netflix (NFLX) are on the rise on Thursday after the streaming giant reported third quarter results, with earnings per share beating estimates and revenue that was in-line with consensus expectations. The company posted strong international subscriber growth and its U.S. subscriber base grew in the third quarter, despite investor fears. However, the streaming service giant missed its own subscriber growth target for the second consecutive quarter.
RESULTS: After market close on Wednesday, Netflix reported third quarter earnings per share of $1.47 and revenue of $5.25B, with consensus at $1.04 and $5.25B, respectively. The company also reported total paid net adds of 6.8M, an increase of 12% year over year and an all-time third quarter record.
For the fourth quarter, Netflix sees earnings per share of 51c, with consensus at 81c, and revenue of $5.44B, also below consensus of $5.52B. The company is forecasting 7.6M global paid net adds, with 0.6M in the U.S. and 7.0M for the international segment. This implies full year 2019 paid net adds of 26.7M, down from 28.6M last year. "While we had previously expected 2019 paid net adds to be up year over year, our current forecast reflects several factors including less precision in our ability to forecast the impact of our Q4 content slate, which consists of several new big IP launches, the minor elevated churn in response to some price changes, and new forthcoming competition," the company said.
Additionally, Netflix believes the company is on track to achieve its full year 2019 operating margin goal of 13%, while acknowledging that the launch of competing services will be "noisy." "Many are focused on the 'streaming wars,' but we've been competing with streamers - Amazon [AMZN], YouTube [GOOG], Hulu - as well as linear TV for over a decade. The upcoming arrival of services like Disney+ [DIS], Apple TV+ [AAPL], HBO Max [T], and Peacock [CMCSA] is increased competition, but we are all small compared to linear TV. […] The launch of these new services will be noisy. There may be some modest headwind to our near-term growth, and we have tried to factor that into our guidance. In the long-term, though, we expect we'll continue to grow nicely given the strength of our service and the large market opportunity," Netflix said.
RATING CUTS: Following quarterly results, Huber Research analyst Craig Huber double downgraded Netflix to Underweight from Overweight, noting this was the second straight quarter where net paid streaming member additions missed guidance. The company's fourth quarter guidance was also disappointing amid heightened streaming competition, which will be intensifying further and increase quarterly volatility in forecasting quarterly net paid member additions, Huber said. The analyst argued that due to competition, Netflix will likely have to hold off on price hikes through 2021 while programming costs are likely to be rising. Craig Huber was with Barclays (BCS) and Morgan Stanley (MS) before Huber Research was founded back in 2012.
Macquarie analyst Tim Nollen also downgraded Netflix to Neutral from Outperform with a price target of $325, down from $375. The analyst noted that growth in the company's key metric, subscribers, is slowing in the U.S. but still strong abroad. Arguing that the company’s U.S. is maturing, Nollen highlighted that subscriber addition growth halved this year, while the revenue effect of price increases should wear off in the first quarter of 2020. Further, it will be hard for Netflix to grow much more in the U.S. with competition coming from Disney and others, he contended. In addition, the analyst sees the company's content costs continuing to rise, with its turn to positive free cash flow taking "many years."
CASH BURN, COMPETITION: Meanwhile, Wedbush analyst Michael Pachter reiterated an Underperform rating and $188 price target on Netflix shares. The analyst acknowledged that third quarter financial results were largely in-line with expectations, with outsized profitability benefitting from content timing and F/X. However, he pointed out that total subscriber growth missed amidst higher-than-anticipated domestic churn, and fourth quarter guidance was modestly below prior expectations. Pachter expects content spending to trigger substantial cash burn for many years, while content migration to competing services and price hikes may slow subscriber growth and increasingly negative free cash flow makes DCF valuation impossible.
Q3 'ENCOURAGING', GUIDANCE CONSERVATIVE: Still bullish on Netflix, Piper Jaffray analyst Michael Olson reiterated an Overweight rating and $400 price target on the shares after the company reported in-line total subscriber adds for the third quarter and offered a "conservative" fourth quarter outlook, as the company incorporates content slate uncertainty as well as new competition from Disney and Apple.
Also commenting on Netflix's quarterly results, Credit Suisse analyst Douglas Mitchelson told investors that the company's third quarter was "encouraging," while fourth quarter guide looks conservative. The analyst has an Outperform rating and $440 price target on the shares. Meanwhile, JPMorgan analyst Doug Anmuth argued that Netflix's earnings report provided increased confidence that it will continue to add subscribers at a "healthy pace" while withstanding new competitive streaming threats. More streaming options will ultimately accelerate the shift away from linear TV, benefiting Netflix, Anmuth contended. He views the company's third quarter subscriber metrics as better than feared and thinks its outlook for fourth quarter is achievable. Anmuth reiterated an Overweight rating and $425 price target on Netflix shares.
TARGETS CHANGED: Following the news, Nomura Instinet analyst Mark Kelley raised his price target for Netflix to $330 from $310, while Wells Fargo analyst Steven Cahall increased the stock’s price target to $308 from $288. Both, however, reiterated Neutral-equivalent ratings on the shares.
Citing global subscriber adds that were a "tad light" due to churn-related weakness in the U.S. markets, RBC Capital analyst Mark Mahaney lowered his price target on Netflix to $420 from $450. Nonetheless, the analyst kept an Outperform rating on Netflix as the company has achieved a "sustainable scale, growth, and profitability" that he believes is currently not reflected in its stock price.
Also reiterating a Buy rating on Netflix, Guggenheim analyst Micahael Morris lowered his price target on the shares to $400 from $420 based on higher operating expense estimates and slightly lower subscriber addition expectations. Bernstein, Cowen, Oppenheimer, and Loop Capital also lowered their prices for Netflix following quarterly results.
PRICE ACTION: In late morning trading, shares of Netflix have gained about 2% to $291.56, which is well off the earlier session highs.
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