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July 21, 2019, 10:52 a.m. EDT

Netflix stock slammed by subscriber miss, but analysts are unfazed

A stronger second-half content slate that includes the latest ‘Stranger Things’ expected to get streaming giant back on track

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By Ciara Linnane, MarketWatch


Getty Images
‘Stranger Things’ is a surefire hit with its fans

Netflix Inc.’s weaker-than-expected second-quarter subscriber numbers sent its stock sharply lower in premarket trade Thursday, but analysts were unfazed by the miss and said they’re sticking with their full-year forecasts.

“Did the world change in the last three months?” Morgan Stanley analysts asked in a note. “We do not believe it did. Moreover, layering in the second-half guide leaves our full-year estimates largely unchanged. If it delivers, 2019 will be another year of record net adds and nearly double-digit ARPU (average revenue per user) growth.”

Analysts led by Benjamin Swinburne laid out their case, noting that Netflix /zigman2/quotes/202353025/composite NFLX +2.25%  has missed quarterly net additions once a year in each of the last three years, only to outperform “meaningfully” in the quarter after the miss. The second quarter is seasonally weak and tends not to include major releases, he said. And the magnitude of the miss—the company added just 2.7 million paid subscribers in the quarter, compared with its own forecast of 5 million—is similar to other misses.

See also: This analyst says bullish Netflix sell siders are trafficking in ‘bullshit

“Ultimately, we take the view that Netflix’s ability to forecast its business has not meaningfully changed,” they wrote. Morgan Stanley has an overweight rating on Netflix stock and a price target of $450 that is 24% above its current trading level.

Read: The Netflix letter to shareholders

At Piper Jaffray, analyst Michael Olson reiterated his overweight rating and $440 price target and said he expects Netflix will continue to capture a “significant” share of traditional content dollars. The miss showed how important the company’s content slate is in attracting new customers, he wrote.

Don’t miss: With Netflix stock upside down, ‘Stranger Things’ becomes its most important series ever

“In the second half, there should be a positive impact from an improving slate and we are, therefore, optimistic about the company’s opportunity to grow subscriber additions y/y in a FY basis,” Olson wrote. He cited the new seasons of “Stranger Things,” “The Crown,” and “Orange is the New Black” along with films from Martin Scorcese and Michael Bay as examples of content he expects will be strong draws.

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Stifel took a similar tone, writing that subscriber guidance “is more art than science” and reiterating a buy rating and $400 price target.

“We believe explanations for the current quarter miss appear reasonable, though with a likely louder market narrative around competition leading up to the November 12th Disney+ launch in the U.S., Netflix shares may be range bound until the next meaningful catalyst, 3Q earnings,” analysts led by Scott Devitt wrote in a note. “At that time, Netflix will have to prove, as it has done many times, that its value proposition remains one of the best on the net.”

Don’t miss: Media companies are taking the wrong approach as they play catch-up with Netflix, analyst says

Netflix is facing a slew of new competitors that are planning to launch streaming services later this year or in 2020, including Walt Disney Co. /zigman2/quotes/203410047/composite DIS +2.16% , Apple Inc. /zigman2/quotes/202934861/composite AAPL -0.18% , AT&T’s /zigman2/quotes/203165245/composite T -0.42%  HBO Max and Comcast Corp.’s /zigman2/quotes/209472081/composite CMCSA -0.49%  NBCUniversal. As a result, Netflix is going to lose some shows that are understood to be among its most popular, notably “Friends” and “The Office.”

JPMorgan’s Doug Anmuth said the net addition miss was meaningful, but agreed that second-quarter numbers are often volatile. Anmuth also agreed with the company’s own explanation that weak content was mostly to blame, but said price increases had likely contributed to the high churn rate.

“We continue to view the 2H content slate as perhaps NFLX’s best-ever,” he wrote. JPMorgan continues to rate the stock as the equivalent of buy with a $425 price target based on a sum-of-the-parts valuation.

Wedbush analyst Michael Pachter raised his price target on the stock, but at $188, up from $183, it remains one of the most bearish on Wall Street. Netflix closed Wednesday at $362.44.

“We expect content spending to trigger substantial cash burn for many years; notwithstanding four Netflix price increases in the last five years, cash burn continues to grow,” Pachter wrote in a note.

The analyst, a longtime Netflix bear, maintains that the stock is not reflecting the marketing and content spend needed in the next few years for the company to maintain its subscriber growth.

“Content migration and price hikes could cause a deceleration in subscriber growth, and consistently negative FCF (free cash flow) makes DCF (discounted cash flow) valuation impossible,” he wrote.

Pachter rates Netflix stock at the equivalent of sell.

See: Netflix agrees to edit suicide scene from ‘13 Reasons Why’ — after teen suicides spiked in months after Season 1 premiere

Netflix shares have gained 21% in 2019, while the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.12% has gained 19% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.04%  has added 17%.

See now: AT&T earnings: Expect another quarter of big video losses

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Ciara Linnane is MarketWatch's investing- and corporate-news editor. She is based in New York.

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