Netflix surprised Wall Street on Wednesday when it reported fourth-quarter earnings and subscriber growth.
In the US, net additions totaled 1.93 million, much better than the consensus forecast among analysts of 1.38 million and Netflix’s own prior estimates. Earnings per share were $0.15, two cents above the median forecast.
Netflix’s performance drove its stock higher in after-hours trading. On Thursday, it hit an all-time high of $143.45, up by 6%, in the first few minutes of trading.
The streaming service is making a major push outside the US and investing heavily in original content that works for audiences everywhere.
“We are in no rush to push margins up too quickly, as we want to ensure we are investing aggressively enough to continue to lead internet TV around the world,” the company said in its earnings letter.
Below are some analysts’ reactions to the earnings results and their ratings of the stock.
Price target: $95 (from $80)
Comment: “While the international subscriber growth will drive the stock higher, we note cash burn remains above expectations, with fixed cost leverage elusive,” said John Janedis.
Credit Suisse: NEUTRAL
Price target: $143
Comment: “For the longer term, Netflix will be looking to show a greater balance between growth and profitability – which to us validates the long-term investment thesis for its international and newer cohorts to follow along the margin expansion trajectory of the US,” said Stephen Ju and Christopher Ford.
Price target: $130
Comment: “We remain cautious on some items we have discussed at length in previous notes, namely rising content and other costs, and concurrent FCF [free cash flow] burn in the face of rising competition, but subs are what drives this stock and for now the sub additions are covering these,” said Tim Nollen. “As such, we are upgrading the stock from underperform to neutral.”
Morgan Stanley: BULLISH
Price target: $165
Comment: “After elevated churn in mid-2016 due to the price ‘un-grandfathering,’ 4Q saw even stronger rejoins than 3Q suggesting that many of the members that canceled the service have ultimately come back,” said Benjamin Swinburne. “Margins continue to surprise to the upside domestically as well, expanding nearly 400bp [basis points] YoY and nearly reaching 40% in 4Q.”
Price target: $155
Comment: “Key risks include content costs, competition, international expansion, and capital needs,” said Heath Terry.
Deutsche Bank: NEUTRAL
Price target: $110
Comment: “Original content investment will consume significantly more cash than we had previously forecasted, driven by ~70% growth in original programming hours, an increase in self-produced content as a % of the overall mix, and an increase in the average cost per hour as Netflix increases the quality and the profile of its original programming,” said Bryan Kraft.
RBC Capital Markets: BULLISH
Price target: $175 (from $150)
Comment: “Netflix is reaching critical mass with consumers in an increasing number of countries based on its user experience, content, and pricing,” said Mark Mahaney. “And although it faced elevated churn in mid-’16 due to price increases, it did succeed with the price increase.
“The key domestic evidence is accelerating revenue growth in Q4 (27%) and record-high contribution margin (38%). The key international evidence is record high sub adds (5.1MM) and first-ever contribution profit ($16MM in Q1).”
Price target: $165
Comment: Revenue was slightly above Opco/Street on stronger int’l sub growth, driven by original content/localization,” said Jason Helfstein. “This should significantly alleviate investor concerns about competition, proving NFLX’s ability to develop compelling original content for int’l markets.”
- Thomson Reuters