Bernstein Analyst Say The Netflix Story Is Worse Than You Think

Netflix, Inc. NFLX reported a significant miss in 2Q16 net adds, both domestically and internationally. Bernstein’s Carlos Kirjner maintained an Underperform rating on the company, with a price target of $62.

Netflix reported its 2Q16 consolidated revenues at $2,105 million, marginally below the consensus expectation of $2,110 million. Operating income of $70 million significantly beat the consensus estimate of $48 million.

Net Adds Miss

Netflix reported domestic net adds of 0.16 million, versus consensus of 0.53 million. The company guided to 0.30 million net adds for 3Q16, also meaningfully below the consensus estimate of 0.77 million.

Domestic net adds declined 82 percent y/y in 2Q and the 3Q guidance reflects a 66 percent y/y decline, analyst Carlos Kirjner noted.

International net adds were reported at 1.52 million, versus consensus forecasts of 2.10 million. The company guided to 3Q16 international net adds of 2.00 million, also missing expectations of 2.85 million.

Worse Than You Think

“The addressable market is smaller than you think and the long-term subscriber penetration will likely be lower than you think,” Kirjner wrote. He expressed concern regarding Netflix being able to exceed ~60M domestic subscribers and ~75M international subscribers, while the consensus expectations are currently at around 70M for long-term domestic penetration and more than 120M for international penetration.

While several investors believe that Netflix has room to increase prices significantly, this would have a meaningful impact on churn, the analyst pointed out.

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