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The Ratings Game

Jan. 21, 2022, 12:52 p.m. EST

Netflix stock heads for biggest slide in nearly a decade—’We see few catalysts’

By Barbara Kollmeyer and Emily Bary

An earlier version of this story misstated the new rating held by KeyBanc analysts. It has been corrected.

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How about a slew of Wall Street analysts racing to downgrade shares of streaming giant Netflix on Friday, after its deeply disappointing outlook for new subscribers.

Netflix (NAS:NFLX) shares were off 20.1% in midday Friday trading and on track for their steepest single-day percentage decline since July 25, 2012, when the stock lost 25.0%. Investors dumped the stock after the company issued a downbeat subscriber forecast for the current quarter.

Friday’s selloff is lopping roughly $50 billion off Netflix’s market value.

The bleak view on subscribers triggered losses for rivals as well, with shares of Disney+ and Hulu owner Walt Disney (NYS:DIS) , down over 4% and streaming device maker Roku (NAS:ROKU) off more than 5%.

“Net, we see few catalysts,” said KeyBanc Capital Markets analysts Justin Patterson and Sergio Segura, who cut their rating on Netflix shares to sector weight from overweight.

Despite a stronger content slate, gross subscriber additions remain “soft” after pandemic-fueled acceleration seen in the first half of 2020, said the KeyBanc analysts. Since the second quarter has historically been slow for Netflix, the company faces pressure to dial up the momentum later in the year so that it can achieve a reasonable annual total.

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KeyBanc sees the prospect of declining operating income and earnings-per-share growth through the third quarter of 2022. With the company’s new growth profile, investors may come to pay more attention to Netflix’s price-to-earnings multiple, which makes the “risk/reward” balance less attractive, in their view.

Analysts at Morgan Stanley also commented on how Netflix’s improved programming lineup doesn’t seem to be helping its subscriber momentum. While they were willing to give the company a bit of a pass last year given pandemic-related production shutdowns, they now see Netflix producing content at targeted levels but without the desired subscriber payoff.

The first-quarter outlook “implies this ramp in content is not translating into the 20-25 million net adds we have underwritten historically,” they wrote, while downgrading the stock to equal-weight from overweight and cutting their price target to $450 from $700.

Elsewhere on Wall Street, Barclays analysts dropped their rating on Netflix to equal weight from overweight, and they slashed their price target by 37% to $425 from $675 a share.

“While Netflix performance in Q4 was roughly in line with guidance, the company’s outlook in many ways played almost perfectly into the bear thesis on the stock going into the quarter,” said Barclays analysts Kannan Venkateshwar, David Joyce and Ross Sandler.

In addition to giving a weak outlook for subscriber numbers, the company expects no margin growth in 2022. “While some slowdown in margin growth was expected in ’22 because of the outperformance over the last couple of years, the degree of slowdown guided to is much worse than expected,” he said.

“Overall therefore, based on company guidance, 2022 is effectively shaping up to be the company’s slowest year of growth on most KPIs [key performance indicators],” said the Barclays team.

Evercore analysts cut their rating to in line from outperform, dropping their price target to $525 from $710.

“There are a slew of explanations – heightened near-term churn due to the U.S. price increase (plausible), macro challenges in Latam (plausible), rising competition (possible but hard to specifically point to), a very late Q1 content slate releasewith Bridgerton (arguable), Omicron uncertainty (why not), market maturity (possible), and changed seasonality with the elimination of free trials in most regions (possible),” said a team of analysts led by Mark Mahaney.

“But the negative inflection implied by the Q1 guidance is very significant,” they said.

Netflix’s stock earned one upgrade following the disappointing results, though it wasn’t a ringing endorsement. Benchmark’s Matthew Harrigan, who has had a bearish position on Netflix for the past two years, lifted his rating to hold from sell Friday.

“Netflix stock should find a floor as the $405 after market price discounts both member growth deceleration and margin underachievement,” Harrigan wrote in a note to clients. He “vacated” his previous $470 stock price target, but said he sees fair value for the stock at $450.

Still, despite the rush of downgrades, more than half of the analysts tracked by FactSet who cover Netflix’s stock remain bullish on the name. One, Jeff Wlodarczak of Pivotal Research Group, said he still liked the company’s story over the medium and long terms, even though he sees a rockier stretch more immediately.

“As for the stock, it would not surprise us even off a substantial decline in the pre-market, that NFLX stock may be dead money amidst muted results in 1Q and the seasonally weak 2Q and the likely need to prove out that there is still significant growth left in streaming,” he wrote.

But ultimately he thinks Netflix’s “flywheel” remains intact, “just operating at a slower pace given the massive pull forward of demand enabled by pandemic shutdowns.”

Wlodarczak has a buy rating on the stock, though he decreased his target to $550 from $750.

Another analyst, Daniel Salmon of BMO Capital Markets, suggested that the company should consider thinking creatively about new revenue streams, such as licensing older shows that it owns to other streaming platforms.

By doing so, the company would essentially “reverse engineer ad-supported NFLX on others’ platforms” and expose its content to new viewers, which could ultimately help it attract more subscribers of its own.

Salmon rates the stock at outperform but cut his target price to $650 from $700.

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