Netflix shares stumbled out of the gate Friday, slipping nearly 8% as investors reacted to the company’s forecast for much slower subscriber growth in the second half of 2020.
The downturn, which left the stock at about $485 in morning trading, comes after the company reported strong second-quarter earnings Thursday and a gain of 10.1 million subscribers in the period. While the results themselves won raves, the company’s prediction that it would add just 2.5 million subscribers in the third quarter rattled the markets and sent shares down 10% after hours.
Propelled by stay-at-home measures during COVID-19, Netflix has now reached almost 193 million subscribers worldwide. It is powering ahead, releasing new movies and series at a time when most entertainment companies have been waylaid by the pandemic.
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The downside of the spectacular first half of 2020 — whose subscriber gains came close to the full-year tally in 2019 — is that it creates a “pull-forward” of growth, leaving much less impressive quarters ahead. It will also create hard-to-match comparisons in 2021, UBS analyst Eric Sheridan noted this week as he downgraded the stock. Price increases could also complicate the story.
Financial analysts nevertheless had mostly upbeat reactions to the earnings report overnight, though, with many pointing out that the stock had surged 60% in 2020, making its pullback all but inevitable. “This is a great company, but it’s a momentum stock that may take a breather after a strong run,” observed Tim Nollen of Macquarie Capital.
Todd Juenger of Bernstein Research raised his 12-month target price to $573 from $504. He sees the company reaching 300 million subscribers by 2023. “With every conceivable force on Netflix’s side, the [total available market] huge and their advantages growing (both absolute and relative), we continue to take the ‘over,'” Juenger wrote in a note to clients.
Michael Nathanson of Moffett Nathanson is decidedly less bullish, though more due to valuation than the merits of the company. He rates Netflix stock “neutral,” but also raised his price target from $372 to $390.
“The old adage that ‘luck is the residue of design’ applies perfectly to Netflix right now as there is zero doubt that the fallout from the current state of global affairs has been very, very good for the company,” Nathanson wrote in a note to clients. “So, although Netflix may currently enjoy some good fortune, their focus on providing customers with the most economical and varied entertainment option has prepared them well for this current challenge. That advantage is obvious now as they are one of only a handful of companies that will likely see 2020 estimates rise during a global recession and pandemic.”
RBC Capital Markets analyst Mark Mahaney boosted his price target to $610 from $500. In a note to clients, he wrote that the company will likely be “looking to flex its pricing power,” which will be a “catalyst” for the stock. A “bonus,” he added, was founder Reed Hastings asserting that he’s “in it for a decade” despite elevating Ted Sarandos to co-CEO.
“Netflix continues to expand its lead as the premiere global video content creator and provider,” Guggenheim’s Michael Morris wrote, “and we expect the sustained financial benefits of this position to become increasingly evident over the next two years.”
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