MarketWatch photo illustration/Netflix
Analysts weighing in on Netflix Inc. earnings on Tuesday were overwhelmingly bullish after a blowout quarter that included a best-ever rise in streaming revenue, but cash burn and the need to raise subscription prices remain concerns.
Wedbush analysts took the most cautious tone in a note that homed in on cash burn, which is still growing despite recent price increases. Analysts led by Michael Pachter said they expect the streaming giant to burn cash for many years as it continues spending vast sums on content.
“International profits may remain elusive due to competition for content and subs, and the price increases could cause a deceleration in subscriber growth,” they wrote. “Negative free cash flow makes discounted cash flow valuation impossible.”
Discounted cash flow uses future free cash flow projections to evaluate the attractiveness of an investment, by discounting them, using a required annual rate to come to present value estimates.
Netflix will burn cash as long as its subscription rates remains at $10.99 in the U.S. and an average of $9 internationally, said Pachter.
“Our competitors appear to believe that the company will deliver leverage from its content spending as it grows its revenue base,” he wrote. “We disagree, given that the vast majority of Netflix’s content (including the bulk of its ‘originals’) is licensed; so long as that is true, Netflix’s content spend is likely to grow in lockstep with its revenue growth.”
That’s the reason why cash burn has increased for each of the last four years and is likely the reason the company is forecasting continued burn for the next few years. Wedbush is sticking with an underperform rating on the stock but raised its price target to $125 from $110.
The stock was trading Tuesday above $337 at a fresh record high, up almost 10% on the day.
Stifel analysts agreed, and said they expect “significant” cash burn in 2019 before expanding margins and slowing original content spend help push the company to positive cash flow by 2021. Analysts led by Scott Devitt said they are modeling about $3 billion of cash burn in 2019, the high end of Netflix’s free cash flow target for 2018.
“In order to bridge to self-funding status and maintain a comfortable cash balance, we expect Netflix will have to raise an additional $8B in total debt financing between now and 2020 (with debt totaling $14.5B in 2020),” they wrote in a note. “Beyond 2020, we expect significant free cash flow generation as Netflix continues to gain global market share of time and wallets.”
Meanwhile, Stifel is sticking with a “hold” rating on the stock but raised its price target to $345 to $325.
Elsewhere, analysts applauded quarterly earnings from the streaming entertainment service, which included 7.4 million more streaming subscribers, well above the more than 6.6 million expected, and a best-in-its-history 43% year-over-year jump in streaming revenue.
“We believe Netflix has built the ideal model for global distribution of premium video in the internet era, and it is working to improve the efficiency of that model at a rapid pace that others cannot currently match,” said a team of equity analysts led by Andy Hargreaves at KeyBanc Capital Markets, as they lifted their price target to $385 a share from $300 and kept their rating at overweight.
Netflix continues to demonstrate a knack for driving subscribers via marketing and content investments, said Hargreaves. He added that the company may end up breaking past KeyBanc’s own forward-subscriber estimates — 28.2 million and 26.8 million for global net subscriptions this year and next. Over the next 10 years, KeyBanc expects Netflix will hit 80 million U.S. subscribers and 250 million globally.
“We find ourselves in a familiar place with Netflix stock, having to stretch our forecast and valuation framework to justify a higher target price, while feeling very confident in the near- and mid-term fundamental outlook.”
Analysts at Morgan Stanley upped their price target to $370 a share from $350, maintaining an overweight rating. A team of analysts led by Benjamin Swinburne zeroed in on what they called a “rare combination” — Netflix beating subscriber-growth forecasts and increasing 2018 margin expectations at the same time.
Morgan Stanley analysts said if Netflix can keep outperforming its own subscriber growth numbers it could begin to expand margins even more rapidly and reduce cash burn, which is the rate at which a company is losing money.
“Importantly Netflix beat the net subs [subscribers] on both domestic and international subs as its shows the company’s aggressive international expansion strategy is bearing fruit and putting major fuel in the company’s growth engine for the rest of 2018 and beyond,” said Daniel Ives, head of technology research at GBH Insights, calling it another “home-run quarter” for the company.
Domestic streaming net adds of 1.96 million against Wall Street forecasts of 1.48 million was a big “positive takeaway for the bulls,” as the numbers grew despite a price increase levied in the December quarter, added Ives.
The latest results get the message across “loud and clear” that the company has plenty of growth drivers in its arsenal to drive more subscriber growth in the U.S. and internationally, he said. Ives, though, has left his highly attractive rating and $375 price target on Netflix unchanged.
Canaccord analysts raised their stock price target to $350 from $280 and reiterated their buy rating.
“We find ourselves in a familiar place with Netflix stock, having to stretch our forecast and valuation framework to justify a higher target price, while feeling very confident in the near- and mid-term fundamental outlook,” analysts led by Michael Graham wrote in a note.
Their only bearish note was that marketing expenses were 7% above their prior estimate, and are expected to trend higher all year.
Netflix has bucked pullbacks that have eaten into gains for other big-name technology stocks this year. Its year-to-date surge of just over 60% is the best return the S&P 500 currently has to offer on that basis right now.
The S&P 500 itself has gained 0.9% in the same time frame and the Dow Jones Industrial has eked out a 0.4% gain.
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