The Street Reacts To Netflix's Q3

Streaming video platform Netflix, Inc. NFLX reported Tuesday with third-quarter results that initially sent shares soaring higher by more than 10 percent. Here's how some of the Street's top analysts reacted to the print.

The Analysts

• Bank of America's Nat Schindler maintained a Buy rating on Netflix with a price target lifted from $410 to $440.
• Morgan Stanley's Benjamin Swinburne maintained an Overweight with a price target lifted from $450 to $475.
• Citi's Mark May maintained a Buy and set a new $400 price target.
• Canaccord Genuity's Michael Graham maintained a Buy with a price target lifted from $450 to $470.
• BMO Capital Markets' Daniel Salmon maintained an Outperform with a price target lifted from $400 to $440.
• KeyBanc Capital Markets' Andy Hargreaves downgraded from Overweight to Sector Weight.
• Guggenheim Partners' Michael Morris maintained a Buy with an unchanged $420 price target.

BofA: Q3 'Erases' Prior Miss

Netflix's Q3 report showed a beat in domestic and international net subscriber adds, while fourth-quarter subscriber guidance also came in ahead of expectations, Schindler said in a note. The Q3 print and Q4 guidance essentially "erase" Netflix's Q2 miss and implies the strong rate of growth seen earlier this year is back on track, the analyst said.

Morgan Stanley: Netflix Built 'Something New'

Netflix's Q2 miss is now overshadowed by Q3, which makes it clear the company has built "something new" in the entertainment industry, Swinburne said in a note. Netflix has created a truly global vertically integrated content production and distribution business, he said. 

Netflix is making the right "creative and financial" decisions in each unique market, which should result in positive free cash flow in 2021 following notable improvements in free cash flow burn in 2019 and 2020, the analyst said. 

Citi: Long-Term Picture

Netflix's earnings report supports a five-year outlook in which the company should do the following, May said:

• Increase its global penetration rate from the current 22 percent.
• Benefit from pricing power and expense leverage.
• Generate $42 billion in revenue.
• Generate $23 in GAAP EPS.

Related Link: 10 Biggest Price Target Changes For Wednesday

Canaccord: 3 Takeaways

Netflix's earnings report is highlighted by three key points, Graham said in a note. They are:

The solid subscriber growth will continue into the fourth quarter.

Netflix's Q4 operating margin guidance shortfall is due to timing of content spend, but 300 basis points of margin expansion is expected for the full year 2019.

A stronger U.S. dollar will generate some "softness" in international revenue moving forward.

Overall, Netflix's earnings report and guidance should make investors "feel good" about the bullish case for the stock, which is based on an expansion of original content that in turn drives sustainable subscriber growth, the analyst said. 

BMO: Math Behind The Bullish Case

BMO Capital Markets' revised $440 price target is based on 10 times the 2019 estimated EV/revenue multiple and $1,190 per subscriber, Salmon said in a note. In comparison, privately held rival Hulu is valued at around 4 times EV/revenue and $774 per subscriber. Netflix's premium valuation versus Hulu is justified given the following, the analyst said: 

• An autonomy of control.
• A large international opportunity that has yet to be fully tapped.
• The opportunity to generate licensing revenue and transform into a more diversified company.

KeyBanc: Short Of Expectations

Despite a beat in subscriber growth in Q3 and a better-than-expected guide for Q4, the case for continued upside in Netflix stock can no longer be made, as other metrics are flashing signs of concern, Hargreaves said in the downgrade note.

The cost of acquiring a new global paying subscriber is likely to increase from $129 in 2017 to $136 in 2018 and $142 in 2019, the analyst said. This implies deteriorating investment efficiency and a need to allocate extra capital to attract subscribers and grow at a stable rate, he said. 

Global incremental contribution margins are likely to grow from 33 percent in 2017 to 35 percent in 2018, but the analyst's discounted cash flow based valuation model assumes global incremental margins of 55 percent from 2020 to 2027.

Netflix isn't growing margins at a fast enough pace to match current estimates, and expectations to beat estimates through 2027 are limited, Hargreaves said. 

Price Action

Netflix shares were trading up 6.49 percent to $368.89 at the time of publication Wednesday. 

Related Link: KeyBanc Downgrades Netflix, Cites A Need For Stronger Revenue Growth

Photo courtesy of Netflix.