Netflix (NASDAQ:NFLX) stock is down about 2% after it reported earnings yesterday that just missed growth estimates. Earnings came in at 30 cents per share of Netflix stocks against analyst estimates of 24 cents. Subscriber additions were also ahead of projections — by nearly 1 million in the case of international subscriptions. But revenues of $4.19 billion fell slightly short of estimates for $4.21 billion.
More importantly, Netflix’s forecast for the first quarter of 2019, was well below the 82 cents per share of earnings and $4.61 billion of revenue that Wall Street had been projecting. NFLX projects earnings of $253 million, 56 cents per share, on revenue of $4.49 billion.
The selling, however, didn’t quite match the buying of two days earlier, after Netflix announced a 13% price hike, to $13 per month for its most popular viewing plan. That sent shares up 6%.
Netflix Stock’s Story Remains Intact
What matters is that the growth story for Netflix stock remains intact. Although investors are paying a high price for it. At a market cap of $153 billion, Netflix is selling at 121 times earnings, and almost 10x revenue. Even with the predicted doubling of earnings in 2019, you’re still looking at a forward P/E near 82.
What justifies the price is the audience, 80 million households viewed Susanne Bier’s Bird Box, a number that is light years ahead of most broadcast audiences. For comparison 2018’s Super Bowl had 103.4 million viewers.
But Super Bowl numbers are down, and Netflix’ global audience is now 139 million. Even that trend is in Netflix’ favor.
Success, however, has a cost. In response to moves by Comcast (NASDAQ:CMCSA), AT&T (NYSE:T) and Walt Disney (NYSE:DIS) to cut into its U.S. streaming market, Netflix raised its budget for producing new content. NFLX spent an estimated $8 billion on content this year, and analysts expect that to rise to $16 billion in by 2022.
The U.S. price hike, which was not replicated globally, also cuts into the consumer budgets AT&T and Disney are going after. The more money people are already spending on Netflix, the less likely they are to add a second or third streaming channel.
Top directors and producers are flocking to Netflix not just for the money, but for the creative control the service offers.
A May 2018 deal with Barack and Michelle Obama was typical of the sort of unique programming Netflix tends to deliver. The price, somewhere between $65 and $99 million, was higher than the couple earned for their autobiographies and quite high for people who haven’t produced TV before. Total creative control, which Netflix has been giving talent since 2011, should keep it competitive even as rivals ramp up their budgets.
The Bottom Line for Netflix Stock
As I wrote in October, Netflix has become a global presence, while its rivals are just approaching the U.S. market. Netflix stock remains very pricey but it has managed to grow into its ever-higher valuations.
Five years ago, when Netflix shares were at about $60, they were considered expensive by analysts who compared it with HBO. A year ago, at $190, they were considered very expensive by analysts comparing them with Time Warner. They opened for trade January 18 at $352 per share, and you’ll hear the same talk about how expensive they are.
But those who have bought along the way have been richly rewarded. Those who bought Netflix into its bear market bottom of $246, just one month ago, are sitting on gains of 43%.
Key Takeaways From Netflix’s 4th-Quarter Earnings
Streaming giant Netflix Inc. (NFLX) reported earnings for the fourth quarter of 2018 after the market closed on Thursday. The company, which over the course of the last several weeks has rallied 51% off its December lows, was closely watched by analysts to see whether or not its red-hot growth story is running out of steam. Observers looking for a definitive answer to this question were left disappointed, as the report tells a complicated and somewhat contradictory story.
Financial talking points
Revenue came in at $4.19 billion, slightly missing consensus expectations of $4.21 billion. The stock traded down 4% from the open (although it has since regained some ground), reflecting investors’ disappointment over the revenue miss.
There are reasons to be positive, however, as the number of new subscribers beat management’s own guidance – 8.8 million new subscriptions versus an expected 7.5 million. Earnings of 30 cents per share also beat expectations of 24 cents.
While the market reacted poorly to the revenue miss, bullish analysts interpreted the earnings release positively, with Goldman Sachs (GS), JPMorgan Chase (JPM), Bank of America Merrill Lynch (BAC), UBS (UBS) and Royal Bank of Canada (RY) all upgrading their price targets to between $420 a share and $480 a share.
Are the fundamentals sound?
Despite the increase in subscribers, the stock is radically overvalued. Over the course of the past month, Netflix has rallied more than any of its FAANG peers, putting it on pace to reach highs not seen since October, when uncertainty surrounding a potential economic slowdown began to set in.
Moreover, the company’s free cash flow burn continues to worry investors and analysts. In the fourth quarter, Netflix logged a deficit of $1.32 billion, for a total of $3 billion for the entirety of 2018. Management has indicated this problem will peak in 2019, but go down thereafter.
Another point that shouldn’t be overlooked is the company just initiated the biggest price hike in its history, increasing the popular $11 per month plan to $13. When asked about the increases on the earnings call, Chief Product Officer Greg Peters said management is confident the price hike will not have a chilling effect on new and existing subscribers:
“I think the model we’ve got is a fairly simplistic one, where we think our job is to effectively invest the money that our subscribers give us every month, so that we can give them incredible content in a better and better product experience,” he said. “And if we do that well, we create more value for our subscribers and then occasionally, we’ll come to them and we’ll ask for a little bit more money, so that we can actually start that next cycle of investment”.
In other words, Netflix believes viewers will be happy to fork out a little extra cash every month in order to keep receiving the high-quality original content the company has become known for. Only time will tell whether this will prove true, but if the record numbers drawn by the recent ” Bird Box” (80 million viewers) movie are anything to go by, then it would indeed seem there is demand for this blockbuster-quality content.
Netflix Analysts Go Gaga and Raise Price Targets Even as Stock Tumbles
Netflix Inc.’s earnings report surprised to the upside on many metrics, yet the stock fell after the streaming giant issued the earnings print.
But analysts all over Wall Street are raising their price targets on Netflix. In fact, 14 analysts raised their price targets on Friday, including Netflix’s biggest bear from Wedbush securities, Michael Pachter.
Netflix reported Thursday earnings per share of 30 cents, beating Wall Street’s GAAP expectations of 24 cents. Turnover amounted to 4.18 billion US dollars, excluding estimates of 4.2 billion US dollars. New customer acquisition abroad was $7.31 million, $6.1 million higher than estimated. In the U.S., customer adds amounted to $1.53 million, exceeding estimates by $1.4 million. And after an increase in subscription prices, Netflix expects 7.3 million new international subscribers in the first quarter of 2019, above a consensus estimate of 6.37 million.
Still, the stock fell after the earnings report and was 1.81% to $346.79 a share Friday afternoon, and was down as much as 3%.
RBC Capital Markets
RBC analyst Mark Mahaney lifted his price target to $480 a share from $450, representing 36% upside. “Global paid sub growth continues to accelerate,” Mahaney wrote in a note Friday. Even with the price hikes, which Mahaney thinks won’t hurt demand much, “Netflix offers a truly compelling value proposition with global appeal.” He moved his operating margin estimate for the full year of 2019 up by 1.1% and his 2019 EPS estimate up by 3.4% to $4.17. He said Netflix hit its “peak free cash flow burn,” which was $3 billion in all of 2018.
JPMorgan analyst Doug Anmuth moved his price target to $435 from $425. “On the heels of NFLX’s US & (partial) LatAm price increase announced earlier this week, 4Q18 results confirmed strong momentum exiting the year & into 2019,” Anmuth wrote in a note. He does think Netflix could lose just more than 1 million paid subscribers from the price increases, but still expects strong revenue growth. In addition, “operating margins should rise successively until 19′ when price increases stabilize, indicating an operating margin exit rate in 2019, at least in mid-adolescence”. One of Netflix’s main objectives is to maintain the operating margin in this area.
Plus, “NFLX’s content momentum should continue in 1Q, a seasonally strong period, & the paid net add forecast could be conservative,” Anmuth said. Netflix’s Birdbox & Black Mirror: Bandersnatch sold well in a usually strong fourth quarter for content. He expects improved operating margins to make Netflix’s free cash flow “meaningfully improve in 2020.”
Analyst Michael Graham raised his price target to $415 from $400. “We are strongly encouraged regarding our investment thesis, which revolves around a rapidly expanding catalog of original content driving continued strong subscriber growth,” he wrote. He added, “Strong content slate in Q4 should continue into 2019; gives Netflix enough comfort to raise prices domestically.” He also expects cash burn to moderate by 2020 on the back of stronger operating margins.
Analyst Benjamin Swinburne raised his target price to $450 from $430. Swinburne summed up much of Wall Street’s collective thesis best. “Fourth quarter results and the first quarter guidance, at a high level, reinforce the investment thesis on NFLX shares – specifically, accelerating net additions, pricing power, and rising visibility into the path towards free cash flow generation,” he wrote.
Analyst Michael Pachter, a long-time Netflix bear, raised his price target up to $165 from $150.
“Netflix management appears confident that the price increase will have little or no impact on churn, guiding to sequentially higher net domestic paid subscriber additions,” Pachter wrote. He added, “We tend to agree with this assessment over the near term, as we think that the vast majority of domestic subscribers use the service frequently.” But his bear thesis is intact, as “the company must replace existing content provided by the four competing studios, and the remaining content available for licensing is likely to be in great demand from Amazon, Hulu and potentially from the four competing new streaming services.” He said he thinks a discounted cash flow valuation is “impossible.”
The stock wasn’t getting any traction Friday, as a strong divergence in investor opinion on the subscription price increases made the volume of Netflix options the second highest out of any stock on the day. “Amid this post-earnings dip we’re seeing heavy options activity on both the bullish and bearish sides, which illustrates the divergence in how traders think the fee increase will affect the stock,” said E*Trade Financial’s Senior Equity Options Strategist Mary Ryan.