For Netflix, Getting (And Keeping) Subscribers In The Face Of Competition Is Expensive

Netflix, Inc. NFLX beat expectations on total subscriber adds, EPS and revenue but the sell-side reaction was mixed with bears worried about lackluster growth in U.S. subscribers and heavy spending on content as competition ramps up.

The mixed results on subscriber adds, strong internationally but below expectations at home, and weak guidance in the face of competition from new cheaper streaming competitors Apple Inc. AAPL and Walt Disney Co DIS had analysts undecided as a group on the value of the stock now.

Investors also seemed wary, with the stock trading down about 2% to $330.97 per share on Wednesday.

The Analysts

BofA's Nat Schindler reiterated a Buy rating and $426 price target on Netflix.

Morgan Stanley's Benjamin Swinburne kept an Overweight rating and $400 price target on the stock.

Wedbush analyst Michael Pachter reiterated an Underperform rating and lowered his price target from $188 to $173.

Instinet's Mark Kelley remained Neutral and kept a $330 price target on the stock.

Credit Suisse analyst Douglas Mitchelson kept an Outperform rating and $440 target price on the stock.

Wells Fargo's Steven Cahall revised his 2020 earnings estimate downward, while keeping a $265 price target and Underweight rating.

KeyBanc's Andy Hargreaves maintained a Sector Weight rating with a $342 fair value estimate.

Needham's Laura Martin continues to have an Underperform rating on the stock.

See Also: Here's How Much Investing $100 In Netflix Stock Back In 2010 Would Be Worth Today

The Theses

Bears pointed to the lackluster guidance for subscription adds in the first quarter, 7 million versus the consensus Street expectation of 8.9 million. But cash burn may be a bigger issue.

Pachter titled his note: "The Oniomaniacs – A Netflix Original," noting that oniomania is a compulsion to spend too much money.

Netflix "continues to spend significantly on new shows, increasing its spending by 20% this year, to a total of $12 billion," Feinseth said.

"Netflix will have a difficult time maintaining its multiple and valuation," Feinseth wrote. "I believe significant downside in Netflix exists and view the recent run-up as an opportunity to take profits."

Is Netflix's Spending Paying Off?

Others had a more positive outlook, based on overall subscription growth.

"The 4Q results and guide reinforce our bullish long-term view, with international streaming net adds setting Q4 all-time highs while delivering over 10% organic ARPU growth," Swinburne wrote.

One other key positive noted by bulls: 2019 was likely the peak of cash burn for Netflix. Instinet's Kelley noted 2020 free cash flow is expected to be better (a smaller deficit) and management outlined more operating margin improvement this year with much of the leverage coming from marketing.

BofA said the spending will pay off anyway.

"We think the press cycle and bear narrative around competition will lose steam exiting ’20 as it becomes clear that legacy rivals cannot sacrifice the margin needed to keep pace with Netflix’s massive ramp up in content spending," Schindler wrote.

More Fodder For Netflix Bulls

Mitchelson also found "more fodder for bulls than bears" in the results, also thanks mostly to international strength.

Mitchelson took notice of management pointing out that Disney+ hasn't taken subscribers from Netflix in markets where it has launched overseas - and said the U.S. may be an anomaly, rather than a canary in the coalmine.

"Further, 4Q19 was likely the toughest competitive launch Netflix will face by far, and the U.S. miss was small relative to Disney+ skyrocketing to a well-ahead-of-expected 20m subs right out of the gates," Mitchelson wrote.

Feinseth warns the international comparison may not be ready to be made yet, pointing out that Disney+ hasn't launched in Europe yet.

Other Views On Netflix, Competition

Cahall: "It’s tough to make money in streaming given consumers’ insatiable content appetites, and we think the long-term economics are unproven at best and brutal at worst."

Martin: "We believe the 4Q19 US sub miss is more troubling than first appears owing to ... in 4Q19, Netflix launched a record 802 hours of original programming (up 3% y/y), including 8 films with 24 Academy Award nominations such as 'The Irishman' and 'Marriage Story.'"

Hargreaves: "The cost of growing subscribers appears to be increasing and pricing increases appear more difficult to fully capture than in previous years. Changes to these trends is likely necessary to increase our confidence that long-term profit expansion can meaningfully exceed current expectations."

Pachter: "After six consecutive years of worsening free cash flow, Netflix has finally guided to FCF improvement of $775 million in 2020. Unfortunately, at this level of improvement, the company still expects to burn $2.5 billion in cash for the full year."

Loup Ventures: "Apple TV+ and Disney+ are essentially free today through various promotions." When that changes, "consumers will have to make more thoughtful streaming decisions."