'Imminent Dilemma'? Netflix's Strong Q1 Net Adds Leave Some On Wall Street Worried

Netflix Inc NFLX reported strong quarterly results Tuesday, with global net subscriber additions well ahead of the consensus estimate.

The Netflix Analysts

Nomura Instinet analyst Mark Kelley maintained a Neutral rating on Netflix and lifted the price target from $330 to $390.

Credit Suisse analyst Douglas Mitchelson maintained an Outperform and increased the price target from $440 to $465.

Needham analyst Laura Martin maintained an Underperform rating.

Wedbush analyst Michael Pachter reiterated an Underperform and nudged up the price target from $194 to $198.

RBC Capital Markets analyst Mark Mahaney reiterated an Outperform rating and raised the price target from $420 to $500.

Normura Says Long-Term Netflix Story Remains In Place

Stay-at-home measures related to the COVID-19 pandemic drove strong paid net adds across geographies at Netflix, Nomura's Kelley said in a Wednesday note.

The analyst termed the guidance of 7.5 million paid net adds for the second quarter as solid. Acknowledging the considerable uncertainty created by the pandemic, the company has taken a measured approach to subscriber growth for the back half of the year, he said.

"While the long-term story does not change significantly, our model changes near term to account for pandemic-related shifts in cash content spend and expenses."

Netflix's Original Content Almost Fully On Track, Credit Suisse Says

More surprising than the strong subscriber growth is the suggestion from Netflix that its original content slate is almost fully on track for the remainder of 2020 and into 2021, Credit Suisse's Mitchelson said.

The analyst said that after the challenging net adds in the second quarter of 2019 through the fourth quarter of 2019 following Netflix's record price hike, pre-COVID gross adds and churn returned to normal.

The subscriber growth came on the back of an increase in activation, with a bit of churn improvement, he said.

Credit Suisse forecast an improvement in free cash flow facilitated by production and studio construction shutdowns.

The firm expects Netflix to experience unexpected share gains in 2020 as its competition is hampered by production stoppages. Although the second-half net adds could decline due to a substantial pull forward of growth, Mitchelson said he sees an acceleration in the shift to streaming due to the pandemic.

Netflix is also poised for an extension of its leadership and scale over streaming competitors and likely a break-even in FCF, the analyst said, along with a full slate of content in 2020, supporting the long-term profitability view.

Needham: Netflix Could Post Multiple Quarters Of Negative Subscriber Growth

The macro environment can't get any better for Netflix given the 50% year-over-year increase in streaming industry volume and a lack of competition from live sports, cinemas and restaurants, said Needham's Martin.

The 20% stock run up into Tuesday's earnings fairly captured the 15.8 million global paid net adds for the quarter, the analyst said.

The stock has more downside valuation risk than upside, as COVID-19 benefits to Netflix will dissipate as 2020 wears on, she said.

Needham also questioned whether the pull forward of growth might lead to negative subscriber growth for several quarters in a row after COVID ends. "Historically, NFLX has been very volatile to the downside whenever subs decline," Martin said.

Dark Cloud Hovers Even With Strong Net Adds, Says Wedbush

Despite outsized subscriber additions, revenue growth was roughly in-line with guidance due to adverse currency impact, said Wedbush's Pachter.

Netflix expects a continued impact from stay-at-home guidelines around the world, as reflected by the second-quarter guidance, which is well ahead of previous expectations, the analyst said.

The company will struggle to produce new content to keep subscribers engaged over the second half of 2020, while also facing risk from competing services, he said.

"We think Netflix faces an imminent dilemma: either see its subscriber growth slow and its cash flow generation improve, or see its subscriber growth continue at a rapid pace with ongoing cash burn."

RBC Says Netflix Fundamentals Were Strengthening Before COVID

A lot was priced into Netflix stock, and the company delivered, RBC's Mahaney said.

The analyst expects subscriber adds to accelerate in 2020, with a likely addition of over 30 million paid adds across the four regions.

Among other metrics, global ARPU should grow modestly, operating margins will likely advance 300 basis points to 16% and FCF will likely decline due to delayed production, he said.

"NFLX is one of the few companies to see greater demand/adoption during the COVID Crisis, though its fundamentals were clearly strengthening prior to that," Mahaney said in a note.

Wedbush's long-term thesis is very much intact, and it has increased conviction in its long-term estimates, the analyst said.