Netflix shares are up almost 20% (at about 10 a.m. Eastern), continuing last night’s after-hours gains. Yesterday the streaming giant released its third quarter earnings report, beating revenue and profit expectations and its own forecast by adding 3.6 million subscribers. Despite such encouraging numbers, bears still doubt whether the subscriber numbers are enough to validate the company’s billions of dollars in content investment, notes Barron’s.
Is Netflix overvalued?
Michael Pachter of Wedbush continues to believe that the stock is overvalued and thus reiterated his Underperform rating but increased his price target from $50 to $60. Pachter notes that the streaming firm spending is spending “exorbitantly” on original content but that “international profitability remains elusive,” and competition for both subscribers and content is getting more intense.
Referring to the company’s cash burn as “unacceptably high,” Pachter says he doubts if Netflix will successfully develop a content library that justifies its spending. Netflix’s current share price does not account for the rising competition from Amazon, which recently launched a video-only subscription option of its own, says Pachter.
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Credit Suisse analyst Stephen Ju reiterated his Neutral rating on the streaming giant but lowered his price target from $132 to $130. Ju noted that with 90% of users being notified about the “ungrandfathered” clause and 75% converting to the higher price, the company has now weathered the “heaviest of the churn headwinds.” Ju noted that the company’s content liabilities grew $1 billion sequentially, and the company projects 1,000 hours of original content in 2017 compared to its outlook of 600 hours this year.
“Despite the improvement in operating margin, we continue to believe that Netflix’s pace of investment in content will only increase as the company looks to maintain its share of the consumer’s viewing time with the best content,” states Ju.
Going will be tough for Netflix
Jefferies was also bearish on Netflix, reiterating its Underperform rating. Analyst John Janedis acknowledged the strong quarterly numbers by raising his price target to $80 from $76 but believes that going forward, growth will more moderate than expected, “especially given difficult comps against international launches in 4Q16 / 1Q17…”
For the fourth quarter, Jefferies expects international net additions of 3.5 million, compared to the company’s guidance of over 3.75 million. For the first quarter of 2017, Janedis expects net international additions of 2.98 million, versus the consensus of +3.7 million.
Laura Martin of Needham & Co. said that even though the increased content spending is negative for profit margins and FCF in the near-term, she appreciates it as it creates long-term library value. However, Martin said they are “worried that traditional US library owners will decide that the valuations they can get by spinning off 10% of Hulu or CBS All Access is higher than their mature multiple times a higher NFLX license fee payment.”
For Netflix, this would mean a more than expected rise in costs for U.S. content, or it could even be denied access to TV and film libraries. Though 100% ownership and diversifying programming sources is a better response, it impacts near-term profitability, the analyst notes.
Meanwhile, Canaccord Genuity’s Michael Graham reiterated his Buy rating and raised his price target from $115 to $140. Graham noted that the streaming giant topped his expectations but said it happened “a quarter earlier than we expected.” Graham also noted Netflix’s plan to ramp its spending on original content next year while “still demonstrating leverage on P&L content costs.”