Wall Street Pours Cold Water on Netflix (NFLX), Analysts Weigh In


Vast caution has begun to loom over entertainment giant Netflix (NASDAQ:NFLX), even after five consecutive quarters of growth.

In the last 12 months, Netflix stock has more than doubled. The streaming powerhouse has shown no signs of losing its reign, that is, until now. With subscriptions, revenues, and expenses all going in unfavorable directions during Q2, many investors have turned to the sidelines on NFLX.

Analysts Victor Anthony of Aegis Capital and Michael Pachter of Wedbush weigh in on the Q2 earnings review that caused NFLX to drop more than 14% in a single day. What happened this past quarter to halt such an impressive run? These experts break down why this drop was so substantial as well as its long-term impact on the stock’s price.

Subscriptions

Before Q2, Aegis predicted the addition of 1.55 million domestic streaming subscribers, while Netflix’s guidance management called for 1.2 million. Both of these numbers seemed modest compared to the 1.96 million that the company tallied during the previous quarter, but considering 2Q17 brought in only 1.07 million new customers, NFLX tried to make its goal a bit more realistic. What seemed realistic, though, ended up being a major stretch; Netflix added only 0.67 million domestic subscribers in Q2, marking one of a mere six times since 2012 that the firm has missed its quarterly subscription guidance. This statistic also fails to consider Netflix’s slip up on the international end. The company added only 4.47 million non-U.S. subscribers this quarter, falling well short of predictions from both Aegis (5.6 million) and guidance (5 million). Moving forward to Q3, guidance predicts fewer subscription additions domestically (0.65 million) and internationally (4.35 million), which is alarming, considering both of these figures are less than they were during underwhelming Q2. Though this shortage could have come from NFLX’s recent raise in subscription prices, not even higher prices could make up for foregone revenues.

Revenues

Similar to how subscriptions failed to meet both domestic and international expectations, so did income. On the home front, Q2 revenue generation of $1.893 billion fell about 1% short of Aegis’ prediction, while contribution profits of $739.6 million fell about 2% short from expectations. Contrarily, while cross boarder revenues ($1.921 billion) fell 2% shy of expectations, contribution profits of $298 million exceeded Aegis’ forecast. In each scenario, though, income levels failed to meet the expectations of both Wedbush/Aegis and guidance. The only indicator that didn’t go in the wrong direction was EPS; at $0.85, it surpassed the expectations of both the consensus and the company’s guidance ($0.79). However, for Q3, the consensus anticipates an EPS of only $0.73, while Aegis predicts it will be as little as $0.60. Future EPS, nor revenues, look promising.

Bottom line

Netflix’s subscribers, and ultimately its revenues, are not coinciding with the company’s visions. On top of these factors, content spending is rising at virtually the same rate as revenues (~$4B/year) and, according to Wedbush, is expected to be weighted in 2H18, which could make quarters 3 and 4 even less profitable than Q2. Pachter expects “content acquisition spending to trigger substantial cash burn for many years” as well as its recent price increases to decelerate subscriber growth.

Analyst Ratings

Extremely pessimistic of the stock, Pachter issues a Sell rating on Netflix stock, with a meager $125 price target. (To watch Pachter’s track record, click here)

A bit more optimistic, Anthony maintains a Hold rating on NFLX, with a $305 price target, which implies a 17% downside from current levels.  (To watch Anthony’s track record, click here)

TipRanks exhibits much more confidence in NFLX. Of the 35 Wall Street analysts polled in the last three months, 24 are bullish, 9 are sidelined, and 2 are bearish on the stock, deeming it a Moderate Buy. With a 12-month average target price of $393.24, the consensus implies 3.63% upside potential from current levels.

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