reports earnings next week, and analysts are trying to sort out how price increases, the pandemic, and increasing competition will affect the company’s results.
While Netflix (ticker: NFLX) had a great year overall in 2020, subscriber growth was far stronger in the first half, providing a negative surprise in the third quarter that continues to weigh on the stock. The top question for investors is whether the company can exceed its fourth-quarter subscriber guidance.
In reporting third-quarter results in October, Netflix projected December quarter revenue of $6.6 billion, profits of $1.35 a share, and net new subscriber additions of 6 million, up from just 2.2 million in the September quarter.
The Wall Street consensus for the December quarter is for $6.6 billion in revenue, profits of $1.38 a share, and 5.9 million net adds. For Netflix, the subscriber number is often more important to stock performance than the relative performance on the revenue and net income lines.
On Wednesday, several analysts weighed in, all sticking with a generally bullish view.
Canaccord analyst Maria Ripps repeats her Buy rating and $630 price target. Despite heightened competition, Netflix has continued to dominate viewing time in 2020, Ripps wrote in a research note, “thanks to the breadth and depth of its original content library,” like Tiger King and The Queen’s Gambit. (Think of them as the royal couple.)
Ripps adds that while Netflix has discontinued free trials and raised prices, rivals have relied on substantial promotions to driver subscribers which could be more liable to churn out. She is projecting 6.7 million subscriber adds for the December quarter, and 28.6 million for 2021, including 9.4 million in the first quarter.
J.P. Morgan analyst Doug Anmuth reiterated his Overweight rating and $628 price target on Netflix shares. He is projecting net adds right in line with the company’s forecast, but thinks the Buy side might actually be looking for 6.5 million. For the March quarter, he is projecting 6.9 million net adds. Anmuth thinks sentiment on the stock is “muted,” with concerns about potential year-over-year net add declines in 2021 after huge Covid-driven growth in 2020, as well as increasing competition from Disney+, HBO Max, Peacock, and others, as well as lingering concerns about how production issues might affect the content slate.
That said, Anmuth remains a Netflix bull. “Netflix is a key beneficiary and driver of the ongoing disruption of linear TV, with the company’s content performing well globally and driving a virtuous circle of strong subscriber growth, more revenue, and growing profit,” he wrote. “We expect Netflix to continue benefiting from the global proliferation of internet-connected devices and increasing consumer preference for on-demand video consumption over the internet, with Netflix approaching 300 million global paid subs by 2024.”
Bernstein analyst Todd Juenger, who regularly tracks how Netflix is tweaking pricing in 50 countries around the world, finds that “evidence is growing that we will see widespread pricing increases in 2021.” In the quarter, he pointed out in a research note, the company lifted prices in the U.S., Canada, and Ireland. And after the quarter ended, Netflix increased prices in the U.K.
“Netflix always characterizes their approach to price as seeking to earn the right to raise price by earning engagement from their members, and always seeking to make sure the value perceived by members far exceeds the price they are asked to pay,” Juenger wrote. “On that basis, it’s hard to argue that Netflix hasn’t earned the right to raise prices by $1/$2.”
Juenger notes that the bear case on the stock is that price increases will lead to additional churn at a time when the company faces a tough comparison with the robust subscriber growth in the 2020 first half, but he keeps his Outperform rating and $573 target price.
In trading Wednesday morning, Netflix was up 2%, to $504.30.
Write to Eric J. Savitz at email@example.com