Shares of Netflix (NFLX) are under pressure on Wednesday despite better than expected quarterly earnings as the company reported a large miss in subscriber numbers in the first quarter. Following the news, Stifel analyst Scott Devitt upgraded Netflix to Buy saying shares should be accumulated on price weakness created by COVID comparisons as Netflix remains "a compelling long-term growth story." Oppenheimer analyst Jed Kelly also assumed coverage of the name with an Outperform rating, telling investors that he views the softer second quarter subscriber outlook as transitory.
RESULTS: After market close on Tuesday, Netflix reported first quarter earnings per share of $3.75 and revenue of $7.16B, both above consensus of $2.97 and $7.13B, respectively. The company also said in its quarterly letter to investors that, "The extraordinary events of COVID-19 led to unprecedented membership growth in 2020, as it pulled forward growth from 2021, and delayed production across every region. In turn, we ended 2020 with a bigger membership and revenue base than we would otherwise have had, contributing to record Q1'21 revenues. And since we were still ramping production levels late last year, we had lower content spend in Q1'21 - content amortization only grew 9.5% year over year in Q1'21 vs. 17% in FY20. The result was a 10 percentage point year over year jump in our operating margin to 27% in Q1, which is an all-time high. As we discussed in past letters, these dynamics are also contributing to a lighter content slate in the first half of 2021, and hence, we believe slower membership growth. In Q1, paid net additions of 4m were below our 6m guidance and the 16m net additions in the year ago quarter primarily due to acquisition, as retention in Q1 was in line with our expectations. We don't believe competitive intensity materially changed in the quarter or was a material factor in the variance as the over-forecast was across all of our regions. We also saw similar percentage year-over-year declines in paid net adds in all regions, whereas the level of competitive intensity varies by country."
For the second quarter, Netflix sees earnings per share of $3.16 and revenue of $7.3B, with consensus at $2.68 and $7.39B, respectively. "With similar pull forward and delayed slate dynamics plus our typical seasonality expected to impact Q2'21, we project paid net additions of 1m (vs. 10m in the prior year quarter) with our UCAN and LATAM regions expected to be roughly flattish in memberships (+/- a couple hundred thousand paid net adds). We anticipate paid membership growth will re-accelerate in the second half of 2021 as we ramp into a very strong back half slate," the company added.
BUY NETFLIX: Stifel analyst Scott Devitt upgraded Netflix to Buy from Hold with a price target of $560, up from $550. The analyst told investors that he has "been waiting for" Netflix to have the quarter in which the pull-forward of subscribers due to the pandemic became evident, as was the case in its first quarter results. While Devitt still expects a three-to-nine month period of working through the remaining COVID comp issues, he argued that shares should be accumulated on the share price weakness created by COVID comps given that he thinks Netflix remains a "compelling long-term growth story."
Meanwhile, Oppenheimer analyst Jed Kelly maintained an Outperform rating and a price target of $620 on Netflix after assuming coverage of the stock. The analyst views the softer second quarter subscriber outlook on C19 delaying new content as transitory, and sees a favorable backdrop for back half net adds on accelerating production releases later in the year. In addition, churn is now below pre-price increase levels, a solid indicator for pricing power, especially with a massive content library that will benefit from the company returning to full production faster than competitors, Kelly contended. Further, the analyst sees Netflix on a clear trajectory toward improving margins, while free cash flow is inflecting positive to fully self-fund productions and establish a $5B buyback program.
PRICE TARGET CUTS: Pivotal Research analyst Jeffrey Wlodarczak lowered the firm's price target on Netflix to $720 from $750, while keeping a Buy rating on the shares. The analyst believes the company's "bullish outlook" is unchanged following the "mixed" first quarter results. The subscriber numbers and second quarter subscriber guidance "felt the hangover from their blowout 2020 and a relative lack of compelling content related to COVID production shutdowns," Wlodarczak told investors in a research note. However, the second half of 2021 "should see major content releases which should significantly juice subscriber results," he added.
Wolfe Research analyst John Janedis also lowered his price target on Netflix to $630 from $640 and kept an Outperform rating on the shares. The company's first quarter net adds was "disappointing," driven by COVID related pull forward, content availability, and macro issues in some regions, the analyst told investors in a research note. But the "key question" for the stock is regarding the slowing due to competition and high penetration, though at this point, he does not see the quarter as a "thesis changer" for Netflix.
Keeping an Overweight rating on the shares, Morgan Stanley analyst Benjamin Swinburne lowered the firm's price target on Netflix to $650 from $700. The analyst thinks the 2021 moderation of net additions is "pandemic-driven" rather than a sign of a suddenly maturing product and sees a positive risk/reward if he is correct in that view. Canaccord, Deutsche Bank, Cowen, Truist, and Macquarie also lowered their price targets on Netflix shares.
PRICE ACTION: In early afternoon trading, shares of Netflix have dropped about 7% to $512.30.
Netflix
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