Suddenly, a war is raging on Wall Street over the vice and virtue of owning shares in Netflix (NFXL), the world's largest video streaming service. This is a surprise because Netflix in recent years had been one of the most popular "momentum" stocks on Wall Street. But the issue that's now affecting Netflix's appeal is its outlook for additional subscriber growth, currently totaling over 81 million.
Its wildly popular streaming service transformed Netflix into a momentum stock that rocketed from just over $8 a share five years ago to a high of more than $133 in late 2015. No wonder the spirited, though volatile, stock captured the fancy of investors and the admiration of Wall Street.
But now, almost suddenly, the stock's powerful upward spiral seemed to hit a wall last week, driving it down by more than 10 percent, to $94.98 a share, on Thursday, April 21. But it ended the week closing 1 percent higher on Friday, at $95.90, reflecting the tug-of-war between the bulls and the bears. The betting is the bulls will likely beat the bears -- at least for this year.
What precipitated the stock's pullback was management's guidance on net subscription additions when it reported first-quarter results on April 18. Some analysts described the results as robust, while others termed them disappointing.
But management forecast that not only second-quarter per-share earnings will come in below consensus Street projections but that international subscriber additions in the quarter will total only about 2 million, versus the consensus estimate of 3.45 million. It's important to note that currently, 42 percent of Netflix's 81.5 million members are outside the U.S.
So, the outlook for international subscribers is a critical metric for Netflix investors, and when the company projected a lower forecast for additional foreign subscribers, investors panicked and sold. Some major Wall Street watchers quickly predicted that the stock is in for more trouble.
"It's difficult to justify Netflix's current valuation," said Carlos Kirjner, equity analyst at investment firm Sanford C. Bernstein, "as guidance indicated a material year-over-year decline in net adds going forward." Kirjner is maintaining his "underperform" rating with a very low price target of $62 a share. He noted that first-quarter consolidated revenues of $1.96 billion "came just shy of consensus at $1.97 billion, while operating income of $45 million was a few million dollars below expectations of $55 million." So, he warned that Netflix's stock has a further "37 percent downside" ahead.
Robert S. Peck, equity analyst at SunTrust Robinson Humphrey, expressed surprise at the low international subscribers outlook, "given the 150 million new addition broadband households added to the footprint in the first quarter." The analyst said in a report that he's "unclear whether the company is being conservative or if there is something more endemic that is causing the slowdown." So, Peck is maintaining his "neutral" rating on the stock, with a price target of $115 a share.
But the bulls aren't buying the bears' prognostications.
JPMorgan Chase has a contrary opinion: It advises investors should "buy the weakness" in Netflix's stock. Doug Anmuth, equity analyst at JPMorgan, is staying with his positive rating of "overweight," although he reduced his price target to $126 a share from $139. Anmuth argued that while the estimated net subscribers addition of 2 million "appeared light," he has seen "seasonality" during the second quarter in past years in the rise and fall of numbers in additional subscribers.
He noted that during 2012-2014, that there was a 44 percent average decline in net subscriber additions. So, Anmuth argued that the better-than-expected guidance and the robust U.S. streaming subscriptions in the first quarter "should ease near-term concerns regarding maturation of the domestic market and the company's pricing power."
Morgan Stanley is also staying bullish on Netflix. It said it's encouraged by Netflix's ability to gain subscribers with its original programming. Moran Stanley's equity analyst who tracks Netflix, Benjamin Swinburne, said the recent pullback in the stock "offered an opportunity for those taking a longer view." He predicts that Netflix is "likely to witness a ramp in third-quarter net [subscriber] additions." The analyst noted that Netflix's U.S. net additions in the first quarter had beaten expectations, with gross additions likely to have increased year-over-year, "thanks to the benefit of key original content."
And Swinburne pointed out in a report that "the fact that new original programming across a broad spectrum (Fuller House, Making a Murderer) drove new member growth ahead of Netflix's own expectations gives us confidence in its ability to continue to grow in a highly competitive market already at nearly 50% broadband penetration." Moreover, net subscriber additions in the international market during the first quarter of 4.5 million were also higher-than-expected, he noted.
But this positive number "was overshadowed by the company's second-quarter guidance of 2 million net additions," said Swinburne, who is staying with his recommendation of "overweight" on the stock, with a price target of $125, down from his earlier price goal of $160.
Both JPMorgan and Morgan Stanley do business with Netflix.
Tuna Amobi, equity analyst at S&P Global Market Intelligence, is another analyst staying bullish on Netflix, with a price target of $120 a share. Amid a wave of continued growth in Internet TV, "we see a continuing momentum in better-than-expected subscriber growth," even as second-quarter guidance was "surprisingly muted."
He figures that after a 23 percent increase in 2015, revenues are likely to advance about 29 percent in 2016 on continued strong subscriber growth and modestly higher pricing on new features. Revenues in 2015 totaled $6.7 billion. Amobi figures that with a shrinking but still profitable DVD business, and after interest expenses and taxes, Netflix will post earnings of 27 cents a share in 2016, and $1.03 in 2017, versus 2015's operating earnings of 53 cents a share.
Amobi said in his latest report that after what he saw as a "quantum leap in early 2016 towards a substantially completed global expansion," he noted some "visibility for sustainable profitability and free cash flow," as Netflix recently reaffirmed its targeted "material global profits" starting in 2017.