Netflix Analysts Cautious Following Q1 Earnings: 'Net Adds Shortfall Will Likely Overwhelm The Narrative'

Netflix Inc NFLX shares dropped 7.5% on Wednesday morning after the company reported first-quarter subscriber growth that fell well short of Wall Street’s expectations.

For the first quarter, Netflix reported adjusted EPS of $3.75 on $7.16 billion in revenue. Both numbers beat consensus analyst estimates of $2.97 and $7.13 billion, respectively. Revenue was up 24% from a year ago.

Netflix also said it added just 3.98 million global paid net subscribers in the quarter well short of consensus estimates of 6.2 million subscribers. Netflix said the pandemic is partly to blame for the slowdown in subscriber growth given the company has not been able to produce as much new content as it would like.

In addition, Netflix is facing a growing wave of streaming video competitors led by Walt Disney Co DIS and AT&T Inc. T. In its report, Disney downplayed the role competitors played in its subscriber growth miss, saying the competition wasn’t a “material factor” impacting its subscriber numbers.

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Impressive Earnings Growth Trajectory: Morgan Stanley analyst Benjamin Swinburne said Netflix is still well-positioned to deliver more than 40% annual EPS growth through 2024.

“Now halfway through the tough comps with expectations reset, user growth upside in 2H21 should drive multiple expansion,” Swinburne wrote in a note.

Raymond James analyst Justin Patterson said economic reopenings may provide a shot in the arm for Netflix’s content and subscriber numbers.

“Due to COVID-19 delaying content, Netflix counterintuitively screens as a reopening stock as the return of key originals (e.g., The Witcher, La casa de papel) creates 2H21 reacceleration potential,” Patterson wrote.

Bank of America analyst Nat Schindler said first-quarter earnings were just a bump in the road, but Netflix’s long-term trajectory remains strong.

“We continue to see a long runway for Netflix to increase its market share from linear TV and we believe that it is in a strong position to continue price increases in 2021,” Schindler wrote.

Some Analysts Skeptical: Raymond James analyst Andrew Marok said a light slate of new content and extremely difficult pandemic comps are a challenging combination for Netflix in the near term and the company’s “net adds shortfall will likely overwhelm the narrative."

“Recently, the story around the stock has increasingly emphasized the company's improving free cash flow profile, which remained solid this quarter, but the magnitude of the net adds shortfall will likely overwhelm the narrative around the stock over the next few months, at least until the choppiness in the cadence of net adds begins to abate,” Marok wrote.

Needham analyst Laura Martin said Netflix may be facing a period of earnings multiple compression, and she prefers Roku Inc ROKU instead.

“It is our view that with predictable and slowing revenue, EBITDA, and FCF growth, NFLX will transition from an EV/Revenue to an EV/EBITDA valuation multiple, with material downside risk from current price levels,” Martin wrote.

Wedbush analyst Michael Pachter said Netflix is approaching saturation in the North American market, and its first-mover advantage will only carry it so far.

"While it is certainly possible that Netflix can grow free cash flow faster by curtailing its content spending, we think that competition for new subscribers will limit Netflix’s ability to do so, as fickle subscribers from at or below median income households are likely to churn more frequently in the future and to rotate among the many new services offered," Pachter said.

Ratings And Price Targets: Morgan Stanley has an Overweight rating and $650 target.

Raymond James has a Market Perform rating.

KeyBanc has an Overweight rating and $650 target.

Needham has an Underperform rating.

Bank of America has a Buy rating and $680 target.

Wedbush has an Underperform rating and $342 target.

Netflix trades around $511.38 per share at time of publication.