Netflix stock market rises, at least 17 analysts raise price targets

The streaming giant provided on Tuesday what is probably one of the few quarterly earnings reports that has lasting effects on investors’ long-term thinking. In particular, Netflix has made it clear that it has now amassed enough subscribers – more than 200 million – with enough average monthly revenue from each (just over $ 11) to support the company. Netflix expects to reach an equivalent level in terms of cash flow in 2021, even with the promise of releasing at least one new movie every week by the end of the year and beyond.

The company, which has debts of about $ 16 billion, said it can now finance operations without borrowing. Netflix will pay off $ 500 million in debt that will be due in cash next month. After that, it is said, he could use the excess cash to buy shares for the first time since 2011.

Comments on the cash flow no doubt astonished those who were discouraged by stocks, saying the company would never have enough self-generated cash to support its ambitious production program. These bears were really wrong about this and more.

For example, Netflix added 8.51 million new subscribers net in the last quarter, exceeding both its own forecast of 6 million additions and more optimistic estimates from Wall Street. This is an impressive comeback from 2 million disappointing subscribers added in the third quarter.

There were concerns that the company’s huge growth at the beginning of the year, as the pandemic shutdown unfolded, 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.

Naysayers also believed that Netflix would suffer from the launch of new streaming services, such as

Disney

+, HBO Max, and Peacock

Apple

TV +. But rather than hurting Netflix, the addition of new streaming services seems to have strengthened the shift of consumers from the loser to this equation: traditional cable and satellite pay-TV services.

Both the reported results and the company’s forecasts for the March quarter were solid. For the December quarter, Netflix reported revenue of $ 6.6 billion, according to estimates, with profits of $ 1.19 per share, in addition to its own forecasts of $ 1.35 per share, largely due to a non-domestic foreign exchange tax related to the euro name of the receivable company.

For the March quarter, Netflix posted revenue of $ 7.1 billion, close to the previous request for the Wall Street analyst’s consensus for $ 7 billion. Management anticipates earnings of $ 2.97 per share, well above the $ 2.10 street forecast. The operating margin in the March quarter will increase 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 for Netflix shares on Wednesday. Former prudent analysts at UBS and Wells Fargo threw in the towel and updated the stock at Buy and Overweight, respectively.

Morgan Stanley analyst Benjamin Swinburne repeated his overweight rating, raised his target price to $ 700 from $ 650, and exulted that his main thesis on Netflix is ​​underway. “I have long believed that as the business expands and its transition to self-produced content unfolds, this business will move to a sustained and substantial annual cash flow,” he wrote. “This moment has come.”

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

“We especially expect continued investment in the production of local foreign films and originals in the next few years,” he wrote.

Analyst Morgan Stanley said that Netflix is ​​one of the largest investors in entertainment programming in the world and that it could become number 1 clearly in a few years from now. In the longer term, he says, it would not be surprising if Netflix moves more openly into new markets, such as live sports, or if it takes a “more opportunistic approach” to acquisitions. But for now, he sees the return of shareholders in additional cash.

Pivotal Research analyst Jeffrey Wlodarczak reiterated his Buy rating, raising its target price to $ 750, the highest on the street, at $ 660. Among other things, the analyst said, the company gained more subscribers than expected in all major geographies, including a net increase of 900,000 in the US and Canada, where it expected only 375,000 net additions. He says the data suggests that the final penetration rate for Netflix services globally could be higher than investors previously anticipated.

“Netflix offers consumers a unique and increasingly compelling entertainment experience on almost any device, with no ads at a relatively relatively low cost,” wrote the Pivotal analyst. “The company seems to operate in a virtuous cycle, as the subscriber base grows, the more they can spend on the original content, which increases the potential target market for their services and increases their ability to take future price increases and dramatically increases entry barriers, driven by the continued growth of materials in terms of global availability / broadband speeds, and the fact that, under most network neutrality regulations, Earth allows Netflix to withdraw almost free of charge for substantial broadband made by telecommunications companies. ”

Bernstein analyst Todd Juenger repeated his Outperform rating, raising his target to $ 671 from $ 591. In his note, Juenger compared Netflix to Disney, noting that even when Disney suspended its dividend, Netflix is ​​considering redemptions. He mentioned that Disney + has less than half of Netflix’s subscribers, at about half of the average revenue per user. He also believes that Disney has a narrower appeal to consumers and pointed out that Disney is facing up to five years of negative free cash flow, while Netflix is ​​becoming positive cash flow.

Juenger said Netflix’s results confirmed many elements of his bullish thesis on the stock. The company added 37 million subscribers in 2020 and believes they will prove to have a high value for life. He said the churn rate has been lower both sequentially and year-on-year, and that the commitment per member – time spent watching Netflix content – has doubled in all regions. The company managed to raise prices; stimulates investment in content; average revenue per user increases in the Asia-Pacific region; free cash flow is positive; and the company is withdrawing its debts, planning to buy back its shares and increasing its subscribers in its domestic market, he noted.

UBS analyst Eric Sheridan raised his share rating to buy from Neutral, while raising his target price to $ 650 from $ 540. He believes that the big payoffs from the announcement were that Netflix showed strong overall subscription growth, even as competition intensified and, following its solid growth in the first half of 2020. At the same time, he noted , the company continues to increase investment in content and has presented a strong, multi-year story for margins and free cash flow.

Sheridan considers Netflix “the leader in the streaming media category,” saying that its core content and technology skills should create a larger subscriber growth and consumer drive that will leverage content”

Write to Eric J. Savitz at [email protected]