Netflix Inc. regained subscriber momentum as the pandemic wore on, though that may not be the biggest highlight from the company’s latest earnings report.
For years, subscriber metrics have been the main driver of Netflix’s stock
but lately the company has been making progress on the financial front as well. Netflix predicted in its Tuesday letter to shareholders that it expects to break even on a free-cash-flow basis for the full year and noted that it could eventually resume share buybacks like it did from 2007 to 2011.
Shares are up 14% in Wednesday morning trading and on track for their largest single-day gain after an earnings report since Oct. 18, 2016, when shares gained 19%.
“We think that serious discussion of whether Netflix could ever generate cash has been over for some time, but now it’s official,” Loop Capital analyst Rob Sanderson wrote in a note to clients, while reiterating a buy rating and $650 price target.
The newfound financial momentum, along with a big subscriber beat, helped earn Netflix an upgrade from Wells Fargo analyst Steven Cahall, who wrote that he’s now a “card-carrying bull” after he was formerly skeptical on the stock.
“The pandemic supported stronger subscriber acquisition, but what has really impressed is how unit economics are coming through,” Cahall wrote. “The company has proven that unit economics start to look attractive at 200mm+ subs. This creates a significant moat as we currently only foresee one other competitor nearby” in Walt Disney Co.
Cahall lifted his price target on Netflix’s stock to $700 from $510 while raising his rating to overweight from equal weight.
Bernstein analyst Todd Juenger wrote that while he’s not a fan of the “constant” comparisons between Netflix and Disney, he couldn’t help but notice a “stark difference” in the financial outlooks for the companies’ respective streaming businesses. Disney, which is newer to the world of streaming, could see four to five years of negative free-cash flow for its Disney+ service, and the platform has half of Netflix’s subscriber count who generate half the average revenue per user.
He titled his note to clients “As Disney suspends its dividend, Netflix prepares a buyback,” while reiterating an outperform rating on Netflix and upping his price target to $671 for $591.
Evercore ISI analyst Lee Horowitz wrote of a potential “powerful shareholder return story on the horizon” as investors debate what could be in store as far as share buybacks.
“While this has always been a potential source for upside, this is the first time in recent history that management has floated the idea of more shareholder returns and a focus on FCF generation,” wrote Horowitz, who has an in-line rating and $460 price target on Netflix shares. “In this vein, a more reasonable earnings multiple framework for Netflix could become a near-term reality if Netflix were to retire a meaningful portion of its float in the coming years.”
Netflix’s latest results confirmed for Pivotal Research Group analyst Jeff Wlodarczak that substantial opportunity remains for the streaming giant.
There had been some doubts about how much runway was left for Netflix in developed markets, but the company added almost 900,000 net new subscribers in the United States and Canada, which came in ahead of the FactSet consensus expectation for 371,000. This dynamic “highlights that the ultimate penetration for Netflix services globally could be higher than anticipated,” wrote Wlodarczak, who raised his price target on the stock to $750 from $660 while maintaining a buy rating.
Still, skepticism remained elsewhere on Wall Street. “We have been consistently wrong about Netflix, but optimism about the company’s potential to generate free cash flow growth of more than $1 billion per year seems to us to be misplaced,” wrote Wedbush analyst Michael Pachter, who rates the stock at underperform with a $340 price target.
Rosenblatt Securities analyst Bernie McTernan wrote that while Netflix’s expectation that it will no longer have to rely on external financing is “supportive” for the company and stock, he still has concerns about free-cash flow “given the upside risk to content costs we see from rising competition.”
He reiterated the neutral rating on the stock, but lifted his price target to $450 from $425.
At least 21 analysts raised their price targets on Netflix shares following Tuesday’s report, according to FactSet. Of the 41 analysts tracked by the service who cover Netflix’s stock, 28 have buy ratings, nine have hold ratings, and four have sell ratings, with an average price target of $614.61.
Netflix shares have gained 69% over the past 12 months as the S&P 500
has risen 15%.