International Subscriber Growth Keeps Analysts Mostly Still Tuned In To Netflix

Will Netflix Inc. NFLX be able to fend off new competition and continue to grow subscribers? It wasn't looking so good a few months ago, but after a rebound in subscriber growth in the third quarter led by overseas customers some analysts are thinking: Stranger Things have happened.

The demise of the streaming pioneer has been exaggerated, some on the sell-side said Thursday, thanks mostly to strong growth internationally, with help from a good quarter from its best-known series, "Stranger Things."

While one sell-side analyst did step to the sidelines on Netflix, several remained in the Buy column, with new hopes for continued growth based on international strength.

The Analysts

Credit Suisse analyst Douglas Mitchelson kept an Outperform rating and $440 target price on the stock.

Morgan Stanley's Benjamin Swinburne kept an Overweight rating and $400 price target on the stock.

Nomura Instinet’s Mark Kelley remains Neutral on Netflix, but increased the target price from $310 to $330.

Bank of America analyst Nat Schindler reiterated a Buy rating but lowered the price target from $450 to $426.

Macquarie’s Tim Nollen downgraded the stock from Outperform to Neutral and lowered the target price from $375 to $325.

KeyBanc's Andy Hargreaves kept a Sector Weight rating on the stock.

Wedbush analyst Michael Pachter reiterated an Underperform rating and $188 price target.

The Theses

"Against a wall of worry, results were better than feared and broadly in-line," wrote Swinburne.

Netflix added 6.8 million new customers in the quarter, just slightly under expectations. But where those subscribers are is key: fewer than 10% of the new sign-ups were in the United States.

Overseas Growth Key

Mitchelson noted that overseas, net subscriber adds were ahead of expectations, with international subscriber growth ending up 55,000 ahead at more than 6.2 million, up a strong 1.2 million year over year. Because of that strong international growth, the company remains a good investment.

"Netflix is a secular winner that has already underperformed due to competition concerns, its differentiated international and film content efforts are kicking in, and investor expectations are now reasonable," Mitchelson wrote.

And as global broadband penetration increases, the overseas market gets bigger, Swinburne said.

There remained concern about what's going on back home. In addition to market saturation, the company has lost some subscribers thanks to a price increase.

Content Questions

Netflix isn't just competing with new entrants for viewers - it's competing for content.

"The company faces a steep uphill climb to replace the content it is slated to lose over the next two years," Pachter wrote. "By the end of 2021 Netflix will have virtually no content from Disney, Fox, Warner Bros. or NBCUniversal, and we think its efforts to replace that content with originals will only partially succeed."

Other Reactions

Hargreaves: Numbers suggest "a level of medium-term saturation and price elasticity that limit our perception of upside to profit growth expectations over the next year."

Kelley remains on the sideline, waiting to see what the impact is from several new competitors, including Walt Disney Company DIS's Disney+, saying new launches will keep a lid on shares until then.

Nollen praised Netflix's subscriber growth, but said it will subside, and in the meantime, the company is going to have to spend more on content and marketing as competition ramps up.

Price Action

Investors continued to react positively to the print, with Netflix shares trading up 3% on Thursday to $294.35.

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