What To Make Of Netflix's Q2 Earnings, Subscriber Growth And Valuation

Netflix Inc NFLX shares traded down on Friday after the streaming video giant missed the market with its second-quarter earnings report on Thursday afternoon.

Netflix reported EPS of $1.59, missing analyst expectations of $1.81. Revenue for the quarter was $6.15 billion, ahead of consensus estimates of $6.08 billion.

Netflix reported 10.09 million global paid subscribers, beating analyst estimates of 8.26 million. However, Netflix said subscriber growth will slow in the third quarter after getting a huge boost in the first half of the year due to COVID-19 shutdowns.

Finally, Netflix said Chief Content Officer Ted Sarandos will join current CEO Reed Hastings as co-CEO moving forward.

Several Wall Street analysts have weighed in on Netflix shares following the report.

Impressive Q2 Numbers

Bank of America analyst Nat Schindler said second-quarter subscriber growth was another blowout number, but the disappointing guidance will likely weigh on the stock in the near-term.

“Despite lower than expected 3Q subscriber growth guidance, we continue to see the acceleration in Netflix subscriber penetration in the first half as a permanent benefit,” Schindler wrote in a note.

Morgan Stanley analyst Benjamin Swinburne said the second quarter represented the first quarter of substantial free cash flow that Netflix has had in more than a decade.

“When the dust settles, we expect 35mm net adds and positive FCF for the year - reinforcing our confidence in long-term cash operating leverage in the business,” Swinburne wrote.

Difficult Comps Ahead

UBS analyst Eric Sheridan said the second-quarter numbers have put the Netflix growth narrative on hold.

“Looking out over the next year, we do worry about slower sub growth that might be followed by a less robust 2021 content slate until 2H21,” Sheridan wrote.

Loup Ventures' Gene Munster said Netflix investors should be prepared for a volatile and difficult year and a half.

“Investors are entering what could be six quarters of noise around Netflix reporting metrics, given the impact of the pandemic on moving subscribers forward this year,” Munster wrote.

Tigress Financial analyst Ivan Feinseth said Netflix’s lackluster guidance and extreme valuation suggest Walt Disney Co DIS is the better play.

“I believe Disney will emerge as the world’s largest streaming service and owns a more robust production studio versus Netflix need to constantly purchase content,” Feinseth wrote.

Troubling Valuation

Benchmark analyst Matthew Harrigan said Netflix’s valuation has gotten way ahead of itself.

“Graphical weekly global net member adds actually went negative in late June and early July, with 3Q20 guidance for only 2.5M global paying member additions well below 5.5M consensus and the 6.2M we had been carrying,” Harrigan wrote.

Needham analyst Laura Martin said Netflix’s valuation is at risk once the company returns to normalized subscriber growth trends.

“To justify NFLX's current valuation based on FCF, we calculate that NFLX must triple revenue to $70B and paid subs must reach 500mm paying an avg of $11/month, based on 2Q20's FCF/revs ratio of 15%,” Martin wrote.

Rosenblatt Securities analyst Bernie McTernan said it’s difficult to justify Netflix’s valuation given it is likely facing decelerating revenue growth.

“NFLX's dominant position as a global streaming player is not in question, but we are cautious NFLX may have pulled forward to the less steep part of the S-curve,” McTernan wrote.

Ratings And Price Targets

• Bank of America has a Buy rating and $575 target.
• Morgan Stanley has an Overweight rating and $600 target.
• Benchmark has a Sell rating and $397 target.
• UBS has a Neutral rating and $500 target.
• Needham has an Underperform rating.
• Rosenblatt Securities has a Neutral rating and $400 target.

The stock traded around $488.67 per share at the time of publication.

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