Analysts Weigh In On Netflix's Rocky Quarter

Netflix, Inc. NFLX reported second-quarter results highlighted by an uncharacteristic decline in U.S. subscribers while international subscriber adds missed expectations. Here is a summary of how some of the Street's top analysts reacted to the print.

The Analysts

Morgan Stanley's Benjamin Swinburne maintains an Overweight rating on Netflix with a $450 price target.

Raymond James' Justin Patterson maintains at Strong Buy, price target lowered from $470 to $450.

KeyBanc Capital Markets' Andy Hargreaves maintains at Sector Weight.

Shares of Netflix were trading lower by 11% to $321.25 on Thursday.

Morgan Stanley: No Reason To Overreact

Netflix's report shows a net subscriber addition that fell short of estimates by more than 2 million, Swinburne wrote in a note. Netflix has shown one net subscriber addition miss once a year for the past three years -- two of which happened in the seasonally light second quarter.

While the magnitude of the subscriber miss looks large, Swinburne said it's roughly consistent compared to prior misses when adjusting for the relative size of the business.

Netflix reported a miss that has some investors asking if anything changed in the past three months. Simply put, the analyst wrote, "we do not believe" any notable changes occurred. In fact, there's no reason to "overreact" as the company could still end 2019 with record net additions and nearly double-digit average revenue per user growth.

See Also: Netflix Short Sellers Up $800M On Subscriber Miss

Raymond James: Bull And Bear Takeaways

Netflix's quarter brings up legitimate "controversy" if the streaming video company reached a maturation stage in the cycle, Patterson wrote, but the company has now grown to a size where subscriber misses has minimal impact on revenue given recent price increases. Also, it should be noted Netflix typically ramps subscriber adds in the back half of a given year.

On the positive side, ARPU is ramping faster than expected and more than offsets churn, while operating margin has now materially outperformed for two straight quarters.

Bears can point to the "tough" quarter against high expectations as a sign multiple compression in the stock is now warranted. The analyst said this narrative could change if Netflix shows "strong" results over the next two quarters.

KeyBanc: Elasticity Concerns

Netflix should be able to show strong global subscriber growth and pricing growth "well into the future," Hargreaves wrote in a note. The quarter-over-quarter decline in U.S. members and a year-over-year decline in international paid subscribers suggests a certain level of elasticity might impact longer-term pricing power if trends continue.

The immediate sell-off in Netflix's stock does improve the risk to reward profile for owning the stock. But increased level of confidence in Netflix's ability to report upside versus estimates in future earnings report will be needed before a bullish stance on the stock can be justified.

Related Link: Is Netflix Becoming Too Expensive?

Gene Munster: C- Grade

Netflix's quarter could prove to be a "pivotal moments" in the company's history as it may signal its best days are now behind, Loup Ventures' Gene Munster told CNBC. The company's slate of content during the quarter wasn't strong enough and roughly coincides with the launch of new competitive services.

Netflix's stock is now trading at 52 times next year's earnings, Munster said. Coupled with Netflix's debt load which stands behind $10 billion and $12 billion, the stock is overvalued -- especially compared to Apple Inc. AAPL, which trades at 15 times next year's earnings.

All told, Munster said a "D+" rating was a consideration to grade Netflix's quarter but ultimately a "C-" is warranted as the company deserves "some credit" for showing subscriber growth.

Photo courtesy of Netflix.