Netflix, Inc. (NASDAQ:NFLX) stock skyrocketed after the company easily beat 4Q earnings estimates, bucking bearish concerns that the company would struggle to keep subscribers immediately after the latest price increase. Numerous analysts raised their price targets for Netflix stock, although at least one firm downgraded it.
Netflix stock downgraded by BRG
In a note to investors, Buckingham Research Group analyst Matthew Harrigan bumped up his price target for Netflix stock from $251 to $257 but also downgraded it from Buy to Neutral, citing valuation and cash burn. He sees upside and downside scenarios for Netflix stock at $369 and $169, respectively.
After seeing the latest set of Netflix earnings results, he now believes that “some of the extreme scenarios advanced by shorts and bullish investors” are now “becoming less likely,” however. He’s also confident that the company can remain a global leader in streaming with Disney and other new entrants becoming complementary additions rather than replacements.
Netflix earnings marked by strong growth, engagement data
The headline from the Q4 Netflix earnings results was the significant beat on subscriber adds as the company added 8.3 million new subscribers after guiding for only 6.3 million. However, the report was also significant because the company gave a rare peek into engagement by disclosing that viewing time per member increased 9% in 2017.
Morgan Stanley analyst Benjamin Swinburne described that “level of growth for a single platform” as being “impressive” because he estimates that the average member spends about two hours watching Netflix every day. He also adds that the growth among Netflix members is coming disproportionally from newer markets where the amount of viewership time is lower than the current longer-tenured base.
He explained that the implication he sees is that Netflix’s more mature markets, such as the U.S., Canada and the U.K., engagement time is growing even faster than the “average.” He added that two hours per day makes the streaming service the most-watched “network” in a home that subscribes to it. As a result, double-digit engagement growth suggests that there’s continuing opportunity for strong growth in members even in the company’s more mature markets.
Swinburne reiterated his Overweight rating and boosted his price target for Netflix stock to $275.
Cash flow still in focus
Barclays analyst Kannan Venkateshwar boosted his price target for Netflix stock from $245 to $285 and maintained his Neutral rating. He focused on cash flow in the Netflix earnings announcement, pointing out that the cash flow guide was worse. However, he also said that the company’s draw on working capital may be peaking.
Netflix management guided for cash flow to be negative in the $3 billion to $4 billion range this year, which is worse than what Venkateshwar had been expecting. He said higher marketing costs and a shift in content spend from 2017 to 2018 drove that difference. Netflix also said that its draw from working capital to pay for content should begin to ease in the longer term, which could mean that 2018 could be the peak.
The company’s cash burn has long been a bearish argument, and Venkateshwar said this could finally calm a key concern of bears. However, Wedbush analyst Michael Pachter, one of the most bearish voices when it comes to Netflix stock, was anything but calmed when it comes to the company’s cash flow. He doesn’t seem to buy the company’s expectation of improving cash flows, as he expects it to “burn cash to fund content acquisition for many years.” He did raise his price target for Netflix stock from $93 to $110 but maintained his Underperform rating due to cash concerns.
Netflix stock skyrocketed to a new record high of $257.71 in intraday trading on Tuesday, pressing the company’s market capitalization past the $100 billion mark for the first time.