Shares closed at $280.48, their highest level in three weeks and up nearly 5% for the day. After a discouraging second-quarter earnings report in July, the stock has retreated and has lost more than 10% of its value in 2019 to date.
Netflix will report its third-quarter financial results on October 16, with those figures capturing a period that includes blockbusters like the third season of Stranger Things.
Goldman Sachs remains upbeat about the company, even though it cut its 12-month price target on the stock to $360 from $420. It expects the company to hit its own estimate of 7 million more global subscribers. “Netflix’s incremental net subscriber additions have grown continuously despite significant competitive pressure,” Goldman analyst Heath Terry wrote in a note to clients Thursday. “We continue to believe that the relative value (price divided by content consumed) of Netflix far exceeds any of the current or planned competitive offerings, making it unlikely that any of them will replace Netflix as consumers’ primary streaming choice.”
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Goldman’s note included a detailed chart (see below) outlining the competitive threats Netflix has faced from consumer entertainment offerings over the past decade-plus. The bar chart shows that as these new offerings have hit the market, Netflix has only continued to gain subscribers and increase prices in the U.S.
Terry said his reduced price target was due to lower expectations for the next quarterly earnings report as well as a broader contraction in internet companies’ stock prices.
Competition in the streaming arena is a key variable in regard to valuing Netflix stock. The longtime streaming leader will face a new level of competition in the coming months. Disney and Apple will launch subscription streaming outlets in November and WarnerMedia and NBCUniversal are preparing their own initiatives for next spring. The fact that these alternatives are emerging — and prompting the withdrawal from Netflix of popular licensed shows like Friends and The Office — has emboldened bears on Wall Street to say that Netflix is in a bind. Surely, the thinking goes, a company with $14 billion in debt can’t keep spending its way to dominance.
And yet, the prevailing view by analysts of the company’s stock is still bullish. Eric Sheridan, a UBS analyst who has long maintained a “buy” rating on Netflix shares, issued an earnings preview Wednesday that predicts a solid quarter.
“While the short term will likely remain volatile, we don’t think a lot has changed about the long-term dynamics of Netflix’s business model,” Sheridan wrote, “a flywheel of compounding subscriber growth leading to scale as content creation success continues to produce pricing power and rising margin/free cash flow dynamics.”
Here is the Goldman Sachs chart:
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