Netflix shares rise by at least 17 analysts to raise price targets

The powerhouse on Tuesday provided what is likely to be one of the rare quarterly earnings reports that has a lasting effect on investors’ long-term thinking. In particular, Netflix has made it clear that it has now piled up enough subscribers – more than 200 million – with enough average monthly revenue from each (just over $ 11) to make the business self-sustaining. Netflix expects to equalize in cash flow by 2021, even with the promise of launching at least one new movie every week at the end of the year and beyond.

The company, which has about $ 16 billion in debt on the book, said it can now finance operations without borrowing. Netflix is ​​paying off $ 500 million in debt that is due next month from cash on hand. After that, he said, for the first time since 2011, he could use excess cash to buy back shares.

The comments about the cash flow undoubtedly amaze those who were bad at the stock, saying that the company would never have enough self-generated cash to maintain its ambitious production schedule. Those bears were wrong about it, and more.

Netflix, for example, added 8.51 million net new subscribers in the quarter, as well as its own forecast of 6 million additions and more optimistic Wall Street estimates. This is an impressive setback from a disappointing addition of 2 million subscribers in the third quarter.

There are concerns that the large growth of the company earlier in the year as the pandemic was shut down stole subscribers from the future. Instead, it seems that growth has simply accelerated. Netflix expects to add another 6 million subscribers in the first quarter.

The naysayers also thought that Netflix would suffer from the implementation of new streaming services such as

Disney

+, HBO Max, Peacock, and

appeal

TV +. But rather than hurting Netflix, the addition of new streaming services seems to have amplified the shift among consumers of the real loser in this comparison: the traditional cable and satellite pay-TV services.

Both the reported results and the company’s forecasts for the March quarter were good. In the December quarter, Netflix earned revenue of $ 6.6 billion, according to estimates, with earnings of $ 1.19 per share, less than its own forecast of $ 1.35 per share, mainly as due to a non-exchange rate charge related to the company’s euro-denominated debt.

In the quarter of March, Netflix had revenue of $ 7.1 billion, close to the previous consensus call for Wall Street analysts for $ 7 billion. Management expects earnings of $ 2.97 per share, higher than Street’s forecast of $ 2.10. The operating margin in the March quarter will rise to 25%, from 16.6% a year ago and 14.4% in the fourth quarter, according to Netflix.

At least 17 analysts raised their price targets on Netflix shares on Wednesday. Previously cautious analysts from UBS and Wells Fargo threw in the towel and upgraded the stock to Buy and Overweight respectively.

Morgan Stanley analyst Benjamin Swinburne reiterates his overweight rating, raising his target price to $ 700, from $ 650, and rejoicing that his primary thesis is playing out on Netflix. “We have long believed that this business will move towards a sustained and substantial free cash flow, as the business scale and the transition to self-producing content play out, moving towards a sustained and substantial free cash flow,” ‘That moment has arrived. ‘

However, Swinburne noted that the shift to a positive free cash flow does not indicate a mature business. In fact, he believes that the company’s spending on content in 2021 is likely to increase by more than 40% from the level seen in 2020 as a result of the pandemic, leaving it 20% higher than in 2019. Meanwhile, he sees that the revenue grows by about 20%. in 2021.

“In particular, we expect continuous significant increasing investment in film production and foreign local originals over the next few years,” he wrote.

The Morgan Stanley analyst said that Netflix is ​​among the largest investors in the world in entertainment programming, and that it may have been the clear no. Longer term, he says, it would not be surprising if Netflix moved more openly to new markets, such as live sports, or if it took a ‘more opportunistic approach’ to acquisitions. But for now, he sees extra cash going back to shareholders.

Jeffrey Wlodarczak, an analyst at Pivotal Research, reiterated his Buy rating and raised his target price to $ 750, the highest on the street, from $ 660. The analyst said, among other things, that the company received more subscribers than in all major geographic areas. areas was expected, including a net increase of 900,000 in the US and Canada, where he expected only 375,000 net additions. He says the data suggests that the eventual penetration rate for Netflix services worldwide may be higher than investors previously expected.

“Netflix offers consumers an increasingly compelling unique entertainment experience on virtually every device, without ads at a relatively low cost,” the Pivotal analyst wrote. ‘The company seems to be working in a virtuous cycle, because the larger their subscriber base grows, the more they can spend on original content, which increases the potential target market for their service and increases their ability to increase future price increases and the barriers for access, reinforced by the ever-increasing increase in broadband availability / speed worldwide, and the fact that Netflix on most of the world allows net neutrality regulations to save almost free back on the substantial investment to increase broadband speeds that telecommunications companies make.

Bernstein’s analyst Todd Juenger reiterated his Outperform rating, raising his target to $ 671 from $ 591. In his note, Juenger compares Netflix to Disney, noting that Netflix, even though Disney has suspended its dividend , consider buying back. He noted that Disney + has less than half of the subscribers that Netflix does, about half the average revenue per user. He also believes that Disney has a smaller appeal to consumers, pointing out that Disney faces up to five years of negative free cash flow while Netflix’s cash flow becomes positive.

Juenger said Netflix’s results confirm many elements of its bullish thesis about the stock. The company added 37 million subscribers in 2020, and he thinks they will have a high lifetime value. He said that the rate levels were steadily lower as well as year after year, and that the involvement per member – the amount of time spent watching Netflix content – increased in all regions by double digits. The company was able to raise prices; it increases the investment in content; average revenue per user is rising in the Asia-Pacific region; free cash flow is positive; and the company is drawing down debt, planning repurchases and growing subscribers in its housing market, he noted.

UBS analyst Eric Sheridan has raised his bid for the stock to buy at Neutral, while raising his target price from $ 540 to $ 650. He believes the big takeaway from the announcement was that Netflix showed strong growth in the number of subscribers, although competition increased, and after its strong growth in the first half of 2020. At the same time, he noted that the company is still investing in content increased and set out a strong, multi-year story for its margins and free cash flow.

Sheridan regards Netflix as “the category leader in streaming media” and says that “core competencies in both content and technology should create a flywheel of greater growth and consumption of subscribers that increases the tax on content spending.”

Write to Eric J. Savitz by [email protected]