Analyst Eric Sheridan, despite lowering his rating, did not change his 12-month price target of $535. Netflix is due to report second-quarter earnings on Thursday after the close of the trading day.
In a note to clients, Sheridan wrote that the company’s “long-term narratives remain intact” and he expects global subscriber numbers to be “significantly higher” than the company’s projections. In the first quarter, powered by the onset of COVID-19 and widespread lockdowns, Netflix added nearly 16 million subscribers to reach almost 183 million. It expects to add another 7.5 million paying customers in the second quarter, for a tally of 190.4 million.
Sheridan cited data from comScore and UBS internal surveys in predicting a stellar quarterly showing as viewership trends remain robust. Because of its volume of programming and global reach, Netflix has been less affected by coronavirus production shutdowns than most of its rivals, especially in the U.S. It has continued releasing new programming through the spring and summer as traditional TV rivals struggle to patch together schedules and film studios contend with shuttered movie theaters.
Despite the positive momentum, Sheridan felt the downgrade was warranted because the go-go 2020 quarters could set too high a bar for future quarters. His assessment accounts for “solid current user dynamics vs. tougher comps for subscriber growth in coming years (especially 2021),” he wrote.
Unlike during recent months, Sheridan observed, “investor fears seem to have disappeared and the current stock price increasingly reflects many of the long-term business moat dynamics including sustained growth in users/revenue and steady state margin expansion.”
Netflix shares have roared upward throughout most of 2020, gaining more than 60% for the year to date. The stock has been among the top-performing names in the S&P 500, which is down more than 2% this year. In a stunning reversal of fortune, Netflix has ridden COVID-19 to a higher market capitalization than Disney, which has been pummeled by the coronavirus across most of its operations.
There remain plenty of skeptics of Netflix on Wall Street, notably firms like Wedbush and Benchmark, which have “sell” ratings on its shares. Rosenblatt and Stifel Nicolaus are two examples of firms with neutral ratings on Netflix.
Most analysts are bullish on the streaming giant, however, especially now that it has managed through a period when several rival services have launched. At one point in 2019, investor confidence was much more wobbly as Disney, Apple, WarnerMedia and NBCUniversal all pledged billions in the effort to close the gap with Netflix. NBCU’s Peacock expands nationally on Wednesday, capping the spree of new streaming entrants.
In a report Monday reaffirming his “outperform” rating, RBC analyst Mark Mahaney pointed out the formidable capacity of the company’s programming machine. The company “announced 60 new originals for July alone,” he marveled. “That’s two originals a day, well ahead of the eight from Disney+, seven from HBO Max, four from Amazon and three from Hulu.”