Netflix Is Now A Free Cash Flow Story: Analysts React To Q4 Earnings

Netflix, Inc. NFLX shares jumped more than 14% on Wednesday morning after the company reported better-than-expected subscriber growth in the fourth quarter and indicated it could launch a share buyback program.

Netflix reported $1.19 in adjusted fourth-quarter EPS, missing consensus analyst expectations of $1.39. However, the company’s $6.64 billion in revenue was slightly ahead of analyst estimates of $6.62 billion and represented 21.3% year-over-year growth.

Perhaps the biggest bullish catalyst for Netflix investors was the company’s subscriber growth. Netflix reported 8.5 million global paid net subscriber additions, far surpassing Wall Street’s 6.47 million estimate. Netflix’s total paid subscribers also surpassed 200 million for the first time.

Finally, Netflix CFO Spencer Neumann said the company could implement a share buyback program in the near future “if we have excess cash.”

Related Link: Here's How Much Investing $1,000 In Netflix Stock 5 Years Ago Would Be Worth Today

Cash Flow Landmark: Morgan Stanley analyst Benjamin Swinburne said Netflix hitting the free cash flow-neutral landmark will significantly reduce investing risk and strengthen the company’s competitive position.

“After a debt funded business model shifting from licensed to original programming over the past five years, Netflix has scaled to a self-funded and now a highly FCF generative business,” Swinburne wrote in a note.

KeyBanc analyst Justin Patterson said dynamics in the media space have taken an ironic twist, with “Netflix now a FCF story” and traditional media struggling with cash flow headwinds.

“This creates a profile of high-teens revenue and 40%+ EPS growth profile through 2022E before controlling for accretion from share repurchases,” Patterson wrote.

Bank of America analyst Nat Schindler said Netflix’s numbers demonstrate the company’s strengthening long-term position.

“We see Netflix ability to continue to grow despite added competition, live sports, and a significant 1H pull-forward as an indication they are strengthening their value prop to consumers and see a long runway to continue to increase market share from linear TV and believe they are in a strong position to continue price increases in 2021,” Schindler wrote.

Valuation Concerns Remain: Raymond James analyst Andrew Marok said Netflix’s strong finish to 2020 sets up a big year in 2021, but the stock’s valuation is already full.

“We believe shares are appropriately valued at ~8x 2021 revenue given our growth outlook of ~20% for 2021,” Marok wrote.

Needham analyst Laura Martin said she still prefers Roku Inc ROKU over Netflix as her top streaming stock pick.

“What happens in 2021 (our view) is that investors conclude NFLX is a media company and ROKU is an internet aggregator, with winner-take-most economics,” Martin wrote.

Rosenblatt Securities analyst Bernie McTernan said Netflix will still continue to struggle with free cash flow issues given rising content costs.

“As the focus of investors continues to gravitate towards FCF over subscriber growth, the medium-term outlook for content cost growth prevents us from being more bullish on the stock,” McTernan wrote.

NFLX Ratings And Price Targets:

  • Bank of America has a Buy rating and $680 target.
  • Raymond James has a Market Perform rating.
  • Rosenblatt Securities has a Neutral rating and $450 target.
  • KeyBanc has an Overweight rating and $650 target.
  • Needham has an Underperform rating.
  • Morgan Stanley has an Overweight rating and $700 target.

Netflix traded around $572.60 per share at publication time.

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Posted In: Analyst ColorEarningsNewsPrice TargetTop StoriesAnalyst RatingsTechAndrew MarokBank of AmericaBenjamin SwinburneBernie McTernanJustin PattersonKeyBancLaura MartinMorgan StanleyNat SchindlerNeedhamRaymond JamesRosenblatt Securities
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