Netflix Numbers Game Is On As Streaming Video Service Turns On Earnings

As earnings season begins its full-steam rollout, not many stocks have been the subject of analyst chatter with as much gusto as Netflix (NASDAQ:NFLX). It’s one of the few, proud to have proved resistant to the coronavirus that has caused so much pain to so many people and other firms.

The countdown to Thursday’s earnings release has been powered by mostly jaunty analyst reports that have upped expectations and price targets. Last Friday, for example, Goldman Sachs (NYSE:GS) raised its price target to $670 a share from $540 based on the firm’s confidence that Netflix’s quarterly report will far outpace guidance.

Why the optimism? A loyal following, a monthly subscription rate that many analysts feel remains affordable, and being in the right place at the right time for two current developments in the news — the pandemic and the Black Lives Matter movement.

“Expectations are quite high,” said Stephanie Link, chief investment officer at Hightower Advisors and a CNBC contributor. “They have a product that people want.”

It’s a Numbers Game

The subscription base is a big concern to some analysts, who worry growth could be nearing its peak. Morningstar, for one, considers it a narrow-moat firm, meaning it’s got the competitive advantage in a field that’s getting crowded with the likes of Disney's (NYSE:DIS) new streaming video service Disney+, Amazon's (NASDAQ:AMZN) Prime and even Alphabet's (NASDAQ:GOOGL) (GOOG) You
Tube.

Netflix was like honey to bees in Q1, attracting a mind-blowing 15.77 million new subscribers — more than double its 7 million projection — as quarantines kept most Americans indoors.

Can Netflix do it again? Probably not to that extent. The company and the analysts who follow it agree, but many of them still expect plenty of upside. Netflix has remained very cautious on its own forecast for Q2, keeping with a membership population that might swell by 7.5 million, well ahead of the 2.7 million subscribers who joined the club in Q2 2019.

Morningstar sounds like it might even be suspect of that. “Netflix’s subscriber growth took off at the start of 2020 as the coronavirus outbreak gained momentum and people stayed home,” the financial firm said on its website last week. “However, the narrow-moat firm has more subscribers outside of the United States than inside, and we believe that maintaining subscribers in the U.S. will continue to be a challenge for Netflix.”

But stock appreciation in recent weeks has looked like it might run in tandem with the growing number of new cases of COVID-19. Like
Folio, which tracks social media mentions, saw new subscription mentions pacing 50% higher on a year-over-year basis during the 90 days ended June 30. Meanwhile, cancellation mentions were down 16% over the same period, important because lower churn typically means viewers are sticking around longer.

GS analyst Heath Terry believes Q2 will be another blockbuster at 12.5 million new subscribers and doesn’t believe that subscriber growth is near topping even this deep into the pandemic.

“While the thesis, ‘If you haven’t subscribed by now, you never will,’ is an easy rhetorical, it fails to capture the reality of Netflix’s earlier stage markets and a dramatically changing world that is pushing changes into every corner of consumer behavior,” he wrote in his note to clients Friday.

“Specific to Netflix, we continue to believe the COVID-19 crisis is accelerating the shift from traditional content consumption to streaming services, as the network effect of subscriber additions, the sheer scale of Netflix’s ad-free content library, and its growing distribution ecosystem serve to steepen Netflix’s growth curve both in the immediate and long term.”

Benchmark analyst Matthew Harrigan doesn’t see it quite that way. Yes, he believes there’s “continued member growth momentum” but thinks that’s all COVID-19-driven, meaning it has pulled forward demand that will hurt numbers in the not-so-distant future. He kept his sell rating on the stock but raised his price target to $397 from $340 — nearly 28% below Friday’s closing price.

For the record, the official Fact
Set consensus is on par with Netflix’s forecast of 7.5 million new subscribers.

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