Netflix Earnings Preview: Wall Street Doesn’t Expect a Major Subscriber Upside Surprise
by Georg Szalai | HollywoodReporter.Com
Troy Warren #business-all
Analysts also forecast password sharing and pricing will be topics when the global streamer reports its latest subscriber and financial results on Tuesday.
Netflix is gearing up to once again open the quarterly earnings season for entertainment companies, providing its first-quarter subscriber and financial update after the stock market close on Tuesday.
After a record-setting 2020 that it ended with more than 200 million global subscribers, helped by stay-at-home orders due to the coronavirus pandemic, management has projected 6 million subscriber additions globally for the opening period of 2021. And Wall Street doesn’t expect a major upside surprise, certainly not like a year ago. That and the tough year-ago comparison are widely seen as explaining why the stock hasn’t moved much this year.
“The market has been bracing for the ultimate in tough ‘COVID comps,'” wrote Morgan Stanley analyst Benjamin Swinburne in an April 14 report entitled “A Look at the Streaming Leader Post-Pandemic.”
Various analysts have in recent days published their own forecasts and predictions, which are roughly in line with company expectations or slightly higher. Beyond subscriber trends, expect investors and analysts to keep a close eye on monthly pricing and password sharing commentary from Netflix management.
After all, in the first quarter, the global streamer, led by co-CEOs Reed Hastings and Ted Sarandos, introduced “four significant price hikes,” namely in the U.K., Germany, Japan and Argentina, after a fourth-quarter increase in the U.S., noted Bernstein analyst Todd Juenger who also expects price increases to follow in more countries later this year.
In addition to pricing, recent Netflix moves to crack down on password sharing is also seen as possibly having an impact on subscriber trends after it recently emerged that the firm has been testing emails that remind some users to create their own accounts if they do not live with a paying subscriber.
“Our monthly proprietary survey of 2,500 U.S. consumers suggests Netflix could add incremental subs by more aggressively deterring password sharing,” Cowen analyst John Blackledge wrote in an April 12 report. “We think the roughly 45 percent of U.S. users who share a password per our survey leaves Netflix well positioned should they choose to aggressively tamp down on password sharing, given the ramp of originals and consistently increasing value proposition of the service. While our survey shows that password sharing has declined from 55 percent of households in the first quarter of 2016, it still comprises about 45 percent of Netflix households in the first quarter to date through February.”
Blackledge, who has an “outperform” rating on Netflix shares with a $675 price target, forecasts the company will post 6.05 million subscriber additions for the first quarter, including a gain of 660,000 in the U.S. and Canada. Noting that this was well down from the 15.8 million in the year-ago period driven by the coronavirus pandemic, he explained that the company was “still working through some of the massive pull-forward in the first half of 2020 due to COVID lockdowns.” But the analyst also emphasized: “With a third wave of COVID leading to recent lockdowns in key markets, we expect Netflix engagement to remain high.”
J.P. Morgan’s Doug Anmuth, who has an “overweight” rating and $685 price target on the stock, in a Tuesday report forecast 6.3 million first-quarter user additions, but said that overall investor expectations “are no higher than guidance based on recent investor conversations.” And he said: “We believe overall sentiment around Netflix remains muted given COVID-related pull-forward driving year-over-year declines in net adds, along with increased competition and price increase concerns.”
Anmuth expects second-quarter subscriber net adds could drop to 4.4 million given “tough” year-ago comparisons, the re-opening of the economy and “typical second-quarter seasonality,” but “we believe net adds will grow year-over-year in the back half of ’21.”
The expert expects Tuesday’s earnings day could bring “commentary on potential upcoming account sharing initiatives,” explaining: “We expect the efforts to focus on the U.S. and Canada, Netflix’s most mature market (penetration of around 56 percent of broadband households) and we believe account sharing efforts could target up to about 20 million U.S./Canadian users.”
Swinburne sees Netflix hitting management’s 6 million subscriber gain target in the latest quarter before a drop to 3.5 million in the second, followed by re-acceleration to 5.8 million in the third and 9.7 million in the fourth quarter. “We expect net additions to begin increasing year-over-year in the second half of 2021 and in 2022,” he wrote.
Swinburne reiterated his “overweight” rating on Netflix’s stock with a $700 target price, highlighting that he sees the streamer reaching profit margins of 40 percent down the line. “We have seen impressive fixed cost leverage of late,” he noted. “As Netflix has entered all major entertainment genres at scale (most recently feature films) and all geographies, including with local content, we are confident we should see this leverage over time.”
Meanwhile, long-time Netflix bear Michael Pachter, analyst at Wedbush Securities, has maintained his “underperform” rating on the stock with a price target of $340.
“Netflix has executed extremely well during the pandemic, surprising us by keeping its foot on the gas pedal for subscriber growth, while benefiting from a disruption in content production schedules that allowed it to generate positive free cash flow,” he wrote in a Thursday report. “While we are far more constructive about Netflix than we have been at any point in nearly a decade, we continue to question its valuation. We think it is reasonable to give the company credit for roughly $1 billion in annual free cash flow growth for the balance of the decade, starting at breakeven in 2021.”
But Pachter calculated that this would bring 2030 free cash flow to roughly $9 billion. Applying an “optimistic” 20x multiple “gets us to an enterprise value of $162 billion, far below Netflix’s current enterprise value,” he explained. “This enterprise value results in a 12-month price objective of $340, which we maintain.”
Concluded the analyst: “We have been consistently wrong about Netflix, but optimism about the company’s potential to generate free cash flow growth of more than $1 billion per year seems to us to be misplaced.”
Wall Street will also keep an eye on management commentary on original productions amid and after the pandemic. The streamer just a few days ago unveiled it has renewed hit series Bridgertonfor seasons 3 and 4. And it has said that it will this year roll out 71 films, more than one a week.