Netflix reported mixed earnings for the first quarter, and its guidance for the second quarter was a bit disappointing. Now almost a week later UBS analyst Doug Mitchelson lowered his price target on the SVOD company’s stock and has finally joined the crowd on Wall Street.
Second half to be good for Netflix
Netflix released its first quarter results after the close on April 18, and within a day’s time, a dozen analysts lowered their price targets on the streaming firm. At that time, Mitchelson reiterated his Buy rating and price target of $147, but on Monday, the analyst slashed his target to $141 while maintaining his Buy rating.
In a note, Mitchelson said, “We believe expectations for growth have been reset, and catalysts rebuilding for Netflix, after a negative catalyst period (global rollouts completed ex-China and Q2 seasonality not modeled right by the Street).”
He expects Netflix to show stronger international growth the rest of the year after the seasonally weak first half and believes that profit margins will ramp aggressively in the second half of the year as price increases flow through to the bottom line and global roll-out costs ease. By 2020, 60% of U.S. broadband homes (61.3 million subscribers) and 13.8% of international broadband homes (101.4 million subscribers) will have a Netflix connection, according to Michelson’s predictions.
Mitchelson believes Netflix’s core competencies in both content and technology will help it attract a large number of subscribers and also enhance viewing, ultimately resulting in higher ARPU (average revenue per user). This will not only boost content spending but also attract/retain more subscribers globally.
International subscribers: a critical metric for investors
For Netflix investors, the outlook for international subscribers is a critical metric. It is for this reason that they panicked and sold shares when the company projected a lower forecast for foreign subscriber adds. Many believe the stock is in for more trouble.
Carlos Kirjner, an equity analyst at investment firm Sanford C. Bernstein, said that justifying Netflix’s current valuation is a difficult task since guidance indicates that going forward, the firm will see a material year-over-year decline in net additions. Kirjner maintains his Underperform rating on the streaming firm with a very low price target of $62. The analyst warns that Netflix’s stock has a further “37 percent downside” ahead.
On Monday, Netflix shares closed down 2.4% at $93.56. Earlier on Monday, the stock dropped to $92.80, which is a two-month low.