Netflix Analysts React To Company's Controversial Earnings Release

Shares of Netflix initially plunged more than 14 percent after the company released its

after Wednesday's closing bell. The stock then nearly erased all of its losses only to drift lower. By mid-Thursday morning the stock was down by eight percent as Wall Street analysts were issued mixed commentary.

Youssef Squali of Cantor Fitzgerald commented in a note that Netflix's third quarter print was "solid" and the "underlying strength of the model" remains "intact" with the company on pace to end the year with over 74 million subscribers worldwide. Squali added that the "slight increase" in US churn is "likely temporary" and a "hiccup." The analyst pointed out that the company still expects total 2015 net adds to be around six million despite its penetration rate running at 40 percent already. Squali also noted that Netflix's domestic contribution margin of 32.4 percent is ahead of the +200 basis points the company initially targeted for 2015 while management continues to expect 40 percent US contribution margin by 2020. In addition, the company's international losses of $67.6 million was better than the consensus estimate of a $77.7 million loss. Finally, Squali suggested that Netflix continues to have "ample price leverage" as it continues to build its library with "differentiated and proprietary" content. Accordingly, the analyst stated that he remains "constructive" on the stock despite any short-term volatility. Shares remain Buy rated with an unchanged $125 price target.

Michael Pachter of Wedbush commented in a note that while Netflix's management attributed its lower than expected revenue to "involuntary churn," the analyst suggested that a "more plausible" explanation is a combination of price increases and saturation drove churn. Pachter added that investors "continue to overlook" Netflix's increasing cash burn of $(252) million and "relatively modest" net income of "only" $29 million. As such, the analyst is questioning the rationale behind a $40 billion enterprise value, especially when considering that the company will continue burning cash for the next several quarters and may need to raise capital in 2016. Bottom line, investors continue valuing Netflix by "taking the leap of faith" that as the company reaches a much larger size, it can raise prices without losing many subscribers and incorrectly assuming that the price increase will drop largely to the bottom line. In addition, investors are wrong to continue valuing international subscribers as being equally valuable to domestic subscribers. Shares remain Underperform rated with an unchanged $40 price target.

Stephen Ju of Credit Suisse commented in a note that Netflix's revenue miss due to an industry wide transition to chip-based credit and debit cards are "exogenous headwinds" that in no way alter Netflix's consumer value proposition and shouldn't alter its adoption path. Ju continued that he is now modeling a "modest" headwind to near-term net additions but "baked in" a recovery in the second half of 2016. Ju further added three key points he will continue to monitor to see if a change in investment stance is justified: 1) a faster-than-expected realization of target operating margins domestically and internationally, 2) an acceleration of consumer adoption (especially in the international markets) due to the "proliferation" of connected devices, and 3) a moderation of content spend due to traction of its original programming. Shares remain Neutral rated with a price target lowered to $124 from a previous $130.

Paul Vogel of Barclays commented in a note that expectations were "moving up" heading into the print and guidance may have been a bit higher than what the sell-side was expectation but below the more bullish buy-side expectation. Vogel noted that Netflix's performance was "solid" and the company's guidance indicates a continued uptrend trajectory of subscribers, especially internationally. However, the analyst acknowledged that continued subscriber gains alone are enough to propel the stock higher following its large year to date gain. Shares remain Equal Weight rated with an unchanged $115 price target.

Benjamin Swinburne of Morgan Stanley commented in a note that after three straight quarters of subscriber beats, investors were "due for an admittedly mixed quarter." Swinburne continued that while domestic net additions were approximately 270,000 below guidance, in the overall context of a 40 million-plus subscriber base, it is a "fairly immaterial" event. The analyst also added that Netflix's fourth quarter outlook factors in a continued elevated "involuntary churn." Nevertheless, the analyst suggested buying the stock on any pullback ahead of the "seasonally strong" fourth quarter and first quarter period and a batch of international launches. Shares remain Overweight rated with an unchanged $135 price target.

Daniel Salmon of BMO Capital Markets commented in a note that despite a domestic subscriber miss in the third quarter, Netflix can continue to gain subscribers even at higher prices. The analyst noted this is possible due to : 1) "must-see" exclusives, 2) The Disney film deal that comes online next year, and 3) Netflix's investment in exclusive feature films is just beginning. Salmon also noted that favorable macro trends will support the overall sentiment. In addition, the ongoing trend of "cable cutting" should support domestic subscriber growth as consumers re-bundle Netflix with other online and streaming options. Bottom line, Salmon suggested that Netflix's third quarter was "evenly balanced" for an "evenly balanced stock." Shares remain Market Perform rated with an unchanged $115 price target.

Analysts at Blair maintained an Outperform rating with an unchanged $128 price target. Analysts at Goldman Sachs maintained a Buy rating with an unchanged $140 price target. Analysts at SunTrust Robinson Humphrey maintained a Neutral rating with an unchanged $110 price target. Analysts at Piper Jaffray maintained a Neutral rating with a price target raised to $109 from a previous $96.