Netflix subscriber growth faces test after US$43b rally

The cast of ‘Stranger Things’ poses with the awards they won for Outstanding Performance by an Ensemble in a Drama Series at the 23rd Screen Actors Guild Awards in Los Angeles January 29, 2017. — Reuters pic
The cast of ‘Stranger Things’ poses with the awards they won for Outstanding Performance by an Ensemble in a Drama Series at the 23rd Screen Actors Guild Awards in Los Angeles January 29, 2017. — Reuters pic

NEW YORK, July 14 — Netflix Inc will get a chance next week to validate the more than US$40 billion (RM161.9 billion) added to its market value since the company’s blowout earnings report in April.

The main question hanging over Netflix’s second-quarter results — much like the first — is whether the company can add enough streaming subscribers to satisfy investors, whose bullish bets have made the stock the second-best performer in the S&P 500 Index this year. Netflix silenced critics in the first quarter, adding almost one million more subscribers than analysts projected. But analysts have made that task more difficult in recent months by raising subscriber estimates, even as some question the stock’s valuation.

“It’s possible expectations have gotten ahead of themselves,” Macquarie analyst Tim Nollen said in a research note ahead of the results. “It may take a solid beat to keep the stock momentum going.”

Nollen has the equivalent of a buy rating on the stock and said he’s not going against Netflix, even though “expectations are sky-high” heading into Monday afternoon’s report. The Los Gatos, California-based company’s shares fell 2.8 per cent to US$401.94 at 9:44am New York time.

Growth is critical for the television- and movie-streaming company, whose success in adding subscribers has fuelled a surge in market value that now exceeds Walt Disney Co by almost US$12 billion. So far Netflix has proven it can keep finding new customers who are willing to pay as much as US$13.99 a month in the US to watch original shows like Stranger Things and 13 Reasons Why.

Wall Street is looking for second-quarter total subscriber net additions of 1.21 million in the US and 5.06 million internationally, according to the average of seven estimates compiled by Bloomberg News. That compares with Netflix’s forecast of 1.2 million domestically and 5 million globally on April 16.

The company will also give its outlook for the third quarter. Analysts expect total net subscriber additions of 875,000 in the US and 5.05 million for international, according to the average of six estimates.

All of this growth has come at great expense as the company continues to invest in programming. Netflix said last quarter that it plans to spend as much as US$8 billion on content in 2018.

Most of Wall Street has endorsed Netflix’s growth formula. Of the 46 analysts covering the company, more than half have a buy rating and only three recommend selling the stock, according to data compiled by Bloomberg. But the 109 per cent rally in 2018 has given some bulls reason to pause.

Netflix’s share price “reflects little in the way of any risks to the downside from competition,” as well as cash burn and the cost of programming, UBS analyst Eric Sheridan said in a research note on Wednesday. He downgraded the stock to neutral from buy, saying he doesn’t expect “pronounced upside” in the second-quarter results relative to prior periods.

Deutsche Bank analyst Bryan Kraft cautioned that Netflix shares could see a short-term pullback around earnings next week as subscriber additions are more likely to miss estimates than beat them. Options imply a one-day stock move of about 9.4 per cent, similar to recent quarters, according to data compiled by Bloomberg.

Other analysts are sticking to their guns. At least four have bumped their price targets to US$500 or above, implying at least 21 per cent upside from the last closing price. Goldman Sachs and Morgan Stanley, whose targets are among the highest on Wall Street, said Thursday that they expect original content and subscriber additions will continue to push the stock higher. — Bloomberg

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