Netflix (NFLX) will discuss earnings in just a few minutes and analysts on Wall Street will be closely watching.
After starting the year with a strong rally, Netflix’s stock has plateaued in the past few months amid concerns about the future profitability of the streaming industry. As the first large player in the streaming industry, Netflix enjoyed the benefits of first-mover advantage. But Netflix now has extensive competition from Amazon Prive Video, Hulu, Disney+, and Apple, which continue fueling worries on Wall Street. The proliferation of streaming has led content producers to pull their own content from Netflix and put it on their own service. In response, Netflix has spent billions in recent years on original content to retain and grow its subscriber base.
Wedbush analyst Michael Pachter is in the ‘bears’ camp on Wall Street, as he reiterates an Underperform rating along with a $183 price target, which implies nearly 50% downside from current levels. (To watch Pachter’s track record, click here)
Pachter expects Q2 revenue to come in at $4.933 billion with EPS at $0.56. Perhaps more importantly for Wall Street, domestic and international paid subscriber net additions are expected to be 300K and 5 million respectively. While Pachter’s revenue and EPS expectations are almost exactly in line with Netflix’s quarterly guidance, he does expect 300k more international paid subscriber additions thanks to “solid (if unspectacular) slate of new content.”
With two prominent TV shows leaving the platform soon, Pachter is confident that Netflix will be able to survive this loss “for now.” The two shows – The Office and Friends – account for approximately 5% of all time spent on Netflix. Disney+’s launch on November 12th “could cost Netflix another 25% of total viewing hours.” Pachter’s estimates that around 60-65% of Netflix’s total viewing hours are accounted for by content from Comcast, Fox, Disney, and Warner Bros. Pachter says to “expect most of it to eventually migrate away.”
So why the analyst is so bearish? Running the company with cash burn will become more challenging going forward. The analyst noted, “We expect content spending to trigger substantial cash burn for many years; notwithstanding four Netflix price increases in the last five years, cash burn continues to grow.”
Overall, Wall Street has a different view than Pachter. Of 30 analysts polled in the last three months, 24 have rated NFLX stock a Buy, 5 issued Hold, while only Pachter keeps his rating at Sell. The average price target on Netflix is $408.33, which represents a 13% upside on the stock. (See NFLX’s price targets and analyst ratings on TipRanks)