It’s the question that obsessed Wall Street today: Are the softer-than-expected Q2 subscriber numbers, and disappointing forecast for Q3, that Netflix reported last night simply a blip from publicity surrounding a price increase announced last year? Or are they a sign that customers don’t love Netflix as much as Wall Street thought — and are open to switching to competitors including Amazon Prime and Hulu?
Investors are worried. They shaved $5.6 billion off of the company’s market value today, driving the stock price down 13.1%. The top performing stock of 2015 has lost 25% of its value since the beginning of 2016.
CEO Reed Hastings, who apologized for the “volatility,” blamed the disappointing sub numbers on press coverage of a $1 price hike announced last year that was phased in to long term subscribers through 2016.
“We think some members perceived the news as an impending new price increase rather than the completion of two years of grandfathering,” he says. But not to worry: The cash from the price increases will “provide us with more revenue to invest in our content to satisfy members, thus driving longterm growth.”
If he’s wrong, then Netflix is in trouble. Its fans are betting that the company will become a must-have service with a lot of freedom to raise prices. That’s why they stick by Netflix as it burns cash ($254 million in Q2) to help pay for programming and its overseas expansion, and loads up on debt — with plans to add to its $2.4 billion burden by selling junk-rated debt by early 2017.
Here’s a sampling of what some of Wall Street’s sharpest analysts are saying today, going from bulls to bears:
BTIG, Rich Greenfield (Recommendation: Buy, 12-month target price for stock: $130, down from $150)
If we truly believed Netflix was hitting a wall subscriber-wise, with escalating content commitments, we would have no issues reversing our thesis on the stock. But we don’t. We believe we were just a little naive about the near-term elasticity impact of ungrandfathering [the price increase]. However, once churned subs are over “sticker shock” many will come back into the funnel as history has proven, drawn back by compelling content.
Guggenheim Securities Michael Morris (Buy, $130)
[I]t is increasingly difficult to overlook the meaningful slowdown in subscriber growth, regardless of the underlying factor(s). Usage and pricing data support our belief that the Netflix value proposition should drive relatively strong subscriber and revenue growth when compared to pay-TV. However, this analysis does not account for qualitative factors (contractual obligation, more diverse content offering, live sports and other programming) that make pay TV a less “disposable” product even at a significantly lower price point and higher relative utility.
RBC Capital Markets, Mark Mahaney (Outperform, $130 down from $140)
We think it’s hard to rule out market-maturation, competition, and less-than-perfect execution as factors as well. And there’s also the clear negative conclusion that while Netflix has some pricing power, it certainly hasn’t had as much as the company and the Bulls (including us) have believed….We are maintaining our Outperform (though with less conviction) because we believe that [Netflix] will cycle through negative issues (price increase, Olympics distraction) and then benefit from medium-term positive factors (Comcast partnership, content expansion such as Disney and more Original Content).
Piper Jaffray Michael Olson (Overweight, $122)
The reasons for disappointing numbers… appear to be short-term in nature. First, Netflix is facing a higher degree of churn from un-grandfathering related to the price increase, which will be largely complete by the end of Q3. Second, the upcoming Summer Olympics in Rio could prove to negatively impact net sub adds, similar to what was seen during the ’12 London games. We expect both these issues to cast a cloud over the Netflix story through the next several months, but are unlikely to be impactful for long-term penetration of the service.
Morgan Stanley, Benjamin Swinburne (Overweight, $110 from $125)
[T]he risk is that elevated churn remains beyond the price increase and that other factors are at play here. That risk is exacerbated by Netflix’s funding position, which is essentially burning over $1 billion of [free cash flow] a year this year and next, with a capital raise needed to drive the business to [free cash flow] break-even. Sustained churn risk beyond the un-grandfathering period, or a decline in gross adds would put our rating at risk at current prices.
Drexel Hamilton, Tony Wible (Buy, $110 from $120)
[T]he lower than expected sub numbers feed into bearish sentiment and delay the time it will take for [Netflix] to achieve its [total addressable market]. This leads us to reduce our numbers and target to $110 (from $120). However, [Netflix] successfully raised prices, which is the key to unlocking long-term value. In fact, we estimate that less than 2% of the sub base may have left despite a 4% weighted average price increase.
Nomura, Anthony DiClemente (Buy, $110)
[T]he market underappreciates the revenue growth the company is showing from recent price increases. Moreover, Netflix reported contribution profit and operating income above expectations due to revenue growth exceeding expense growth…. we believe Netflix will continue to accrue significant scale benefits as it further entrenches its position as a dominant global distributor of movie and TV content.
Macquarie Capital, Tim Nollen (Neutral, $85 from $110)
The irony is Netflix is beating EPS estimates due to its higher pricing. But higher pricing hurt sub levels in 2011 and subs are what matters for this stock.
BMO Capital Markets, Dan Salmon (Market Perform, $85)
We expect the deceleration of near-term subscriber trends will prompt more questions from investors about [Netflix] as an M&A target ([Apple]being the frequently opined potential suitor), but we don’t expect this is mirrored internally as management remains focused on executing an ambitious 2016 expansion and only after that would consider strategic options, and we think even that is still unlikely.
MoffettNathanson Research, Michael Nathanson (Neutral, $82 from $85)
As we all know, there are two important components of net subscriber additions — gross subscriber additions and churn. Unfortunately, Netflix no longer discloses churn but this is the culprit in the big net sub add misses….We remain cautious on Netflix, even after the after-market stock price decline, due to valuation, its domestic margin structure, and a more skeptical view of the company’s international roll-out that seems to be playing out.
Wedbush Securities, Michael Pachter (Underperform, $50 from $45)
Netflix’s current share price fails to address the potential for meaningful competition from Amazon, which recently launched a video-only subscription option of its own. We acknowledge that Netflix has the much more powerful brand for SVOD, but we are confident that with its new standalone service, Amazon declared war on Netflix….Netflix’s international content may be too thin to attract enough gross subscriber additions to hit its targets, and insufficiently robust to retain as many customers as the company has modeled.
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