Wall Street's Reaction To Netflix's Q2 Earnings Report

Netflix, Inc. NFLX reported its second-quarter results, in which subscriber net additions domestically and international fell short of expectations. The stock fell as much as 14 percent in early Tuesday trading.

Here's a summary of how some of the Street's most notable analysts reacted to the print and subsequent sell-off in the stock.

The Analysts

• Canaccord Genuity's Michael Graham maintains a Buy rating on Netflixwith a price target lowered from $500 to $450.
• Imperial Capital's David Miller maintains at Outperform, unchanged $503 price target.
• BMO Capital Markets' Daniel Salmon upgraded from Market Perform to Outperform, unchanged $400 price target.
• KeyBanc Capital Markets' Andy Hargreaves maintains at Overweight, price target lowered from $385 to $375
• Stifel's Scott Devitt upgraded from Hold to Buy, price target unchanged at $406.

The stock traded around $379 at time of publication.

Temporary Woes

Netflix's streak of delivering large subscriber net addition beats comes to an end after four quarters, Graham said in a note. Multiple factors led to the miss in the second quarter, including a less compelling slate of new content compared to prior quarters.

However, any woes seen in the quarter are likely temporary for two reasons: the last two net add misses (second quarter 2016 and first quarter 2017) were both followed by beats in the subsequent quarter, and management's third quarter net add guidance "de-risked somewhat."

Netflix's long-term value proposition for both investors and consumers remain unchanged although it may take some time for the stock to "find bullish footing again," the analyst said.

Related Link: The FANG's Q2: A Sell-Side Preview

Over-Forecasted Quarter

Netflix's earnings comes just 16 days into the new quarter, which implies the second quarter was "clearly an over-forecasted" quarter, Miller said in a note. A reasonable educated guess says Netflix's management team under-forecasted its third quarter guidance, which would explain any shortfall versus expectations heading into the earnings report.

Even though a downward revision to 2018 estimates is warranted to account for the shortfall, fiscal 2019's estimates move higher to account for a higher average selling price, the analyst said. Specifically, 2018 revenue estimates were lowered from $16.1591 billion to $15.965.3 billion and EPS remains unchanged at $2.91. In 2019, the company's revenue estimate was lifted from $20.08 billion to $20.25 billion and EPS was also lifted from $4.92 to $5.00 per share.

3 Underappreciated Catalysts

Netflix boasts three underappreciated catalysts that could help push the stock higher over the near-term, Salmon said in a note.

The company's internationally opportunity in fast-moving markets like India is starting to ramp as Netflix is releasing new local talent, like "Sacred Games" and "Ghoul," the analyst said. Management is following a similar path in Japan where it's also releasing content tailored for the local market, such as "Devilman Crybaby" and "Neo Yokio."

Netflix's management team likely anticipated for many years a loss of content from producers who are focusing on their own streaming platforms. As such, investor concern is likely overblown and management should be able to handle the situation well.

Netflix is starting to lay the groundwork for potentially high-margin contributions from licensed sales of its intellectual property, such as "Stranger Things" ugly Christmas sweaters.

Continue Owning The Stock

Exiting Netflix's earnings, it's clear the company remains the global leader in entertainment subscription, Hargreaves said in a note. All of its notable competitive advantages and strategic optionality remain in place and perhaps more important, encouraging long-term subscriber and pricing expectations are "virtually unchanged."

Related Link: Stifel Still Likes Netflix's Long-Term Outlook, Upgrades Stock To Buy

5- To 10-Year Plan

Despite falling short of expectations in subscriber metrics in the second quarter, Netflix should be able to double its global subscriber base in the next five to 10 years, Devitt said in a note. In fact, momentum in subscriber additions could pick up in the back half of 2018 due to a compelling line up of new content as the company is targeting the release of 700 original series in 2018 and 80 films.