Earnings

It was a tale of two stories for Netflix according to Wall Street analysts. While the company posted first-quarter revenue that beat estimates, it also warned that it expected light second-quarter guidance.

Shares of the streaming giant plunged 9 percent in extended hours trading after the report but by Wednesday morning had pared those losses to just over 1 percent.

In a letter to investors, CEO Reed Hastings said the U.S. price increase contributed to churn, or customer turnover. Hastings also said he wasn’t concerned about rivals’ new streaming services.

Worries about churn are overblown according to analysts at UBS. “Chill about Netflix churn fears,” analyst Eric Sheridan said.

“We see NFLX as a top pick as it capitalizes on the opportunity to be the global leader in streaming media & the competitive moat around its business widens (via a mix of content spend, marketing, & scale),” Sheridan added.

“NFLX’s first quarter earnings may be controversial to some — mostly because of the light second quarter [subscription] outlook — but we think there’s much more to like here than not,” J.P. Morgan analyst Doug Anmuth said in a note to clients after the report. “We continue to believe that Disney+ will not be a major threat to NFLX subscriber numbers given NFLX’s quality & quantity of content, & that Netflix/Disney+ will not be an either/or decision.”

There’s still room for shares to go higher, Goldman Sachs analyst Heath Terry said.

“As Netflix’s content investments, distribution partnerships and marketing spend drive subscriber growth significantly above consensus expectations and the company approaches an inflection point in cash profitability, we believe shares of NFLX will continue to significantly outperform,” he said.

The reaction from analysts at Credit Suisse was a bit more subdued.

“Overall, while not the net add beat many were hoping for, we believe outlook commentary was quite bullish, especially record first half paid net additions in the face of record price increases, revenue growth accelerating the next few quarters., and a very strong second half content slate,” analyst Doug Mitchelson said.

Here’s what else analysts think of Netflix’s earnings report:

“Chill about Netflix churn fears. Pricing Moves On Full Display & Remains Key Positive Driver. Both for the Q1 EPS report and mgmt Q2 guide, the impact of recent pricing moves in a handful of countries was on full display. In particular, better revenue forecast and weaker sub guide (though we view this as a conservative framing by mgmt) will likely dominate the ST debate. Moving beyond that, we would focus investor attention on NFLX’s key attributes: a) pricing power in developed mkts; b) potential for pricing tiers in developing economies to open up greater scale; c) compound revs at a 20%+ CAGR; d) expand OI margins; e) lessen its dependence on capital market fundraising; & f) has low/no regulatory headwinds. As a result, over the LT, we see NFLX as a top pick as it capitalizes on the oppty to be the global leader in streaming media & the competitive moat around its business widens (via a mix of content spend, marketing, & scale).”

“NFLX’s 1Q19 earnings may be controversial to some—mostly because of the light 2Q sub outlook—but we think there’s much more to like here than not. Key positives that stand out to us: 1) 1Q paid net adds of 9.6M, above expectations of ~9.5M, led by Int’l upside to the guide of 560k; 2) 1Q operating margin of 10.2% was well ahead of our & consensus 8.9% on lower than expected marketing, & even w/some spend shifting later in the year NFLX’s margins should still move sequentially higher through ’19; 3) 1H19 paid net adds are guided up 7% Y/Y—even w/2Q down Y/Y on price increases during a seasonally softer quarter—and NFLX expects 2019 paid net adds to be greater than in 2018. Pushback will come from: 1) a lighter 2Q sub guide, w/paid net adds of 5M below our/consensus 5.4M-5.5M, driven mostly by US, but NFLX is factoring in price increase impact related to the US, LatAm incl Brazil & Mexico, & parts of Europe; 2) Larger 2019 FCF burn at ($3.5B) on higher cash taxes, but NFLX reiterated improvements in 2020 (we think meaningful) & its push to become self-funding.”

“Domestic growth concerns validated: We had highlighted (in an earlier report) the risk to Q2 sub guidance due to recent price increases over a compressed time line, in a seasonally weaker quarter. Q2 US guidance therefore came in lower at 300k vs our and consensus estimates. This guide is comparable to Q2-16 when NFLX’s price increase resulted in higher churn. However, at that point, NFLX’s US penetration rate was 46% compared to 60% today and the price increase was $1 vs $2 this year. Therefore, while the guidance does highlight higher churn, the implicit increase in churn is actually lower vs 2016, normalized for the degree of price increase, penetration rates and absolute price. This points to the fact that underlying US business trends continue to improve despite the headline. This impact should be further muted in 2H’19 given the new seasons of some of the most popular shows (Stranger Things, 13 Reasons Why, Crown) and movies.”

“Netflix paid net add guidance missed Street estimates as price hikes both in the U.S. and in key international markets create a drag on subscriber gains. Guidance for negative free cash flow in 2019 was increased to -$3.5 billion from -$3 billion on higher cash taxes and investment in real estate and production facilities. Netflix guidance for a 13% 2019 operating margin remained constant. Average revenue per user is set to accelerate on price hikes globally, though FX remains a headwind.”

“As Netflix’s content investments, distribution partnerships and marketing spend drive subscriber growth significantly above consensus expectations and the company approaches an inflection point in cash profitability, we believe shares of NFLX will continue to significantly outperform. We remain Buy rated (on CL) and raise our 12-month price target to $460 from $450 to reflect faster subscriber growth expectations, particularly in international markets.”

“We reiterate our Outperform rating and $480 price target in the wake of solid Q1 results. Global Paid Sub Growth is still on track to accelerate Y/Y. Management remains confident in recent U.S. pricing increase. AND NFLX still has premium Revenue growth and Operating Margin expansion. Long-Term Buy thesis FULLY intact”

“Overall, while not the net add beat many were hoping for, we believe outlook commentary was quite bullish, especially record 1H paid net additions in the face of record price increases, revenue growth accelerating the next few qtrs., and a very strong 2H content slate – mgmt indicated they are “not seeing anything inhibiting a long run-way of growth”. Investor consternation will now shift from price increase churn to competition, but Disney+ concerns are misplaced, in our view. Due to near-term tax structure changes, we lowered 2019 EPS $0.90y to $3.28 and 2020 $0.29 to $6.00.”

“All said, 1Q19 results do little change our view on the trajectory of Netflix’s fundamentals. We reiterate our In Line rating /$350PT and continue to view the risk / reward balance at these levels as fair (shares trade at 30x our 2022 EPS forecast, and we project three more years before the company becomes FCF-breakeven).”

“Netflix reported upside for Q1’19 and provided a mixed Q2 outlook. Most importantly, int’l sub adds were ahead of expectations for the quarter and essentially in-line for the Q2 guide. Q1’19 domestic subs were also ahead of consensus, but Q2 domestic sub guidance is below the Street. Q1’19 domestic and int’l contribution profit were each ahead of the Street driving EPS upside. The revenue outlook for Q2 is in-line, while the EPS outlook is below consensus estimates, but EPS is impacted by a change in accounting that results in a higher tax rate for the quarter. Despite an onslaught of new streaming services, we expect Netflix to continue to capture a significant portion of traditional content dollars as they migrate to streaming.”

“Netflix’s quarterly results read largely as expected, with upside to 1Q U.S. and Int’l Paid Net adds, and a soft 2Q guide for U.S. (~300k, roughly in line with us but below Street’s 650k). While bears may nitpick that Int’l Paid Net add guidance was below at 4.7M, it misses the bigger picture. 1H19 Int’l Paid Net dds are projected to increase +19% y/y and tracking ~435k (4%) ahead of Street expectations. 2019E continues to shape up to be a record Paid Net dd year for Netflix. Reiterate Outperform.”

“Lowering target to $410 from $425 on modestly weaker FY19/20 subscriber outlook, partially offset by higher APRU, but maintaining Outperform rating. 1Q global paid subs +25% y/y, modesty slower than +26% in 4Q, with streaming revenue +29% ex. FX, vs. 35% in 1Q, as global ARPU increased 3% ex. FX vs. +7% in 4Q. Higher US price causing modest churn. Margins exceeded guidance, but company maintained prior FY19E margin outlook. Despite new competitive entrants (AAPL and DIS), NFLX cites potential for further upside with only 2% of global downstream mobile internet traffic vs. 10% peak viewing share in US. Product bundles have helped mobile adoption and shown solid traction thus far. Testing various plan prices in India.”

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