Netflix (NFLX) is scheduled to report results of its second fiscal quarter after market close on Thursday, July 16. A video interview with Netflix executives, including CEO Reed Hastings, will follow at 6:00 pm ET. What to watch:
1. SUBSCRIBER 'GUESSWORK': Netflix's subscriber figures are a closely-watched measure of the company's growth trajectory, but one that has certainly been super-charged by the COVID-19 pandemic. In the fiscal first quarter, the company reported global streaming paid net additions of 15.77M, which were higher than forecast as membership growth was accelerated due to home confinement. For Q2, Netflix has forecast global paid net adds of 7.5M members, although it warned when it issued the guidance that "this is mostly guesswork" given the uncertainty on home confinement timing. "Hopefully, progress against the virus will allow governments to lift the home confinement soon. As that happens, we expect viewing and growth to decline," the company said in its last quarterly letter to investors.
On July 9, JPMorgan analyst Doug Anmuth said his analysis of Apptopia downloads data suggests that Netflix's Q2 net subscriber additions will be 8.5M. The analyst raised his estimate for Q2 net adds from 7.4M to 8.5M, above the guidance of 7.5M, and sees potential upside if Netflix's limitation on simultaneous streams has led non-paying users to create their own accounts, "since this effect wouldn't be captured in the download data." Anmuth reiterated an Overweight rating on Netflix shares with a $535 price target.
On July 10, Piper Sandler analyst Yung Kim said the firm's June quarter "Netflix Navigator" search index points to Q2 subscriber growth essentially in-line with consensus for both U.S. and Canada as well as international. The search index suggests Q2 U.S. and Canada subscriber growth of 6% year-over-year versus the consensus of 6.7% and international growth of 40.3% year-over-year versus the consensus at 40.7%, Kim noted.
Most recently, Morgan Stanley analyst Benjamin Swinburne raised the firm's price target on Netflix to $575 from $485 and kept an Overweight rating on the shares. While there has been "much debate" over the pull-forward effect of the pandemic, Swinburne argues that benefits of the 2020 member growth "pull-forward" will likely be lasting as the company will see structural benefits from greater scale and put pressure on its primary competition for audience time, namely incumbent TV broadcasters.
2. COMPETITION: WarnerMedia, owned by AT&T (T), officially launched its HBO Max streaming service on May 27. Peacock, the new streaming service from Comcast's (CMCSA) NBCUniversal, officially launched on Wednesday, July 15.
In the company's last quarterly call with investors, Netflix CEO Reed Hastings said he has "never seen" such good execution coming into a competitive space the way Disney+ (DIS) had. In the associated investor letter, the company said its "content competitors and suppliers will be impacted about as much as we are, in terms of new titles. Since we have a large library with thousands of titles for viewing and very strong recommendations, our member satisfaction may be less impacted than our peers' by a shortage of new content, but it will take time to tell."
3. MOST BULLISH: On July 10, Goldman Sachs analyst Heath Terry raised the firm's price target on Netflix to $670 from $540 and reiterated a Conviction Buy rating on the shares. The analyst expects Netflix to report Q2 results "well above guidance" with at least 12.5M net subscriber additions. Quarterly app downloads reached a record high and year-over-year downloads growth reached its highest level since Q1 of 2016 during the quarter, Terry tells investors. The analyst attributes this to content growth on the platform, a lack of competition for entertainment hours and spend driving churn lower, and more time being spent at home during COVID-19. Further, Terry believes consensus estimates for the second half of 2020 and beyond remain too low.
On July 13, BMO Capital analyst Daniel Salmon raised the firm's price target on Netflix to $625 from $500 and keeps an Outperform rating on the shares. The analyst cites "solid" third-party data on the company's subscriber trends, though he is also leaving his estimates in line with management's guidance and attributes the new price target to the addition of 2029-2030 forecasts, "tweaks" to content spend during the forecast period, and higher long-term subscriber estimates. Salmon added that Netflix shares can continue to rise as the focus shifts from stay-at-home benefits to an improving free cash flow profile.
4. MOST BEARISH: Benchmark analyst Matthew Harrigan, who bucked the trend among his peers by initiating coverage of Netflix a week prior to the company's last quarterly report with a Sell rating, recently raised the firm's price target to $397 from $340, citing continued member growth momentum, though he keeps a Sell rating on the shares. Management has "admitted" that continued member growth amid COVID-19 may only be pulling forward demand. Harrigan argues that the "remarkable" 37% gain from the end of April "appears largely attributable to money flow into large cap growth," adding that he believes the advance in Netflix shares is "attributable to the current U.S. equity market where performance is concentrated among a handful of top Nasdaq stocks, rather than any clear read on long-term performance that can be divined from one quarter's anticipated results."
On July 14, Wedbush analyst Michael Pachter raised the firm's price target on Netflix to $220 from $198 ahead of quarterly results to reflect the likely pull forward of subscriber additions and estimated impact on free cash flow. The analyst anticipates meaningful upside to subscriber additions and revenue, as shelter-in-place around the world has clearly driven streaming usage and viewership up, dampening churn and driving incremental sign-ups. Net subscriber additions in the quarter are likely to approach 15M, Pachter adds. However, he keeps an Underperform rating on the shares.
Societe Generale analyst Christophe Cherblanc, who also maintains a Sell rating on Netflix shares, has a "Street low" price target of $182 for the stock.
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