Citi Says Netflix Q2 Results, Guidance Missed Even The Most Conservative Forecasts

Citi's View

Citi, which has a Neutral rating on the stock, has slashed the price target by 13 percent to $92, saying that Netflix's quarterly results and outlook both were below "even the most conservative forecasts we heard heading into the report."

Netflix attributed higher churn to the noise around the un-grandfathering of recent price increases and, thus, subscriber growth missing expectations. These factors will likely continue near term, including in the fourth quarter.

Meanwhile, increased investments in content and higher G&A kept margins and cash flow under pressure. Netflix, however, reiterated its target of returning to "material [net income] profits in 2017."

Related Link: Bernstein Analyst Says The Netflix Story Is Worse Than You Think

"[W]hile we model net income to grow ~70 percent in 2017 to $212 million, we forecast continued cash burn through 2019," analyst Mark May wrote in a note.

The analyst expects free cash flow (FCF) burn of $1.1 billion in both CY16 and CY17, and forecast a debt financing in the fourth quarter given Netflix's expected cash needs.

Disappointing Results, Guidance

May said domestic streaming revenue of $1.21 billion (+18 percent year-over-year) and subscribers of 47.1 million were both 1 percent below Citi's estimates.

The third-quarter guidance for domestic subs (+300 thousand sequential net additions) is 150 thousand (34 percent) below Citi's figures — although revenue guidance of $1.31 billion is 4 percent above, as recent price increases flow through.

Meanwhile, international streaming revenue ($758 million) was in line, although subscribers (36.0 million) were 1 percent below Citi estimate and third-quarter guidance for 2.0 million sequential net subscriber additions is 460 thousand, or 19 percent below Citi estimate and below even the bears' forecasts.

"While we continue to have a favorable long-term view of Netflix and view the valuation as increasingly less stretched, we view the catalyst/setup factors this year as less favorable and CY17 forecasts as potentially still too high," May highlighted.

Shares of Netflix closed Monday's regular trading at $98.81. In the pre-market hours Tuesday, the stock plunged 13.67 percent to $85.30.