Was Netflix's Second Quarter a Blip or a Trend?

The Street had modest expectations for on-demand entertainment streaming giant Netflix Inc. (NFLX) ahead of its third-quarter earnings report. While bears were holding out following a disappointing Q2, loyal investors reaped rewards on better-than-expected net subscriber growth. 

Netflix Cools Off Q3 Spike, Street Remains Largely Bullish

In the third quarter, Netflix added nearly 7 million new subscribers, compared to the 5.3 million added over the same period last year and the 5 million forecasted on the Street. Solid subscriber growth and one-time accounting-related benefits helped Netflix post profits above the consensus estimate, with earnings per share (EPS) at $0.89, a full $0.21 above the Street’s forecast. Heading into Q4, Netflix is headed for EPS of $0.23, roughly half of the Street’s projection. This is due in part to the cost of producing original content, one way Netflix has warded off new competition in the red-hot streaming industry.

Following the report, sentiment on the Street was largely bullish, sending Netflix shares up as high as 15% in extended trading. But as news set in, the stock began to cool off in early trading, and at least one bear on the Street downgraded their rating. 

Goldman Sachs analyst Heath Terry, who rates Netflix at Buy, upped his 12-month price forecast from $420 to $480, reflecting a 30.7% upside from current levels. Terry believes that the new subscriber data demonstrates “the strength of the content line-up through year-end [and] amplification from newer distribution partners and growth in the addressable audience, particularly in early-stage mobile-first markets.” The Goldman Sachs analyst sees Netflix approaching “an inflection point in cash profitability following the current investment period in advance of the loss of Disney content late next year.”

JPMorgan analyst Doug Anmuth, who rates Netflix at Outperform, echoed the upbeat sentiment and lifted his price target to $450. “Overall, we believe third-quarter results and the fourth quarter guide indicate that Netflix is back on track,” he said. 

RBC Capital Markets’ Mark Mahaney also increased his Netflix price forecast to $450. “We don’t believe in ‘open-ended growth stories.’ But, darn, Netflix is about as close to one as you can find in today’s market.”

Barclays began with “Netflix: Nailed it,” while BMO Capital Markets announced, “Confirmed: Last quarter was a blip, not a trend, reiterate at outperform.”

It sounds like a Cinderella story coming out of the second quarter, but not all on the Street are as optimistic about Netflix’s rally.

In a note to clients following the blockbuster earnings report, KeyBanc analysts lowered their rating on Netflix stock from Overweight to Sector Weight and set a new price target of $377, implying a mere 2.6% upside from current levels. While the firm “remains positive on Netflix’s opportunity to grow subscribers and revenue,” analysts indicated that revenue growth and margin expansion have not developed at a pace that meets their expectations, “which suggests upside is more limited.”  

With trading up roughly 6% on Wednesday morning at $367.28, Netflix reflects a 91.3% return year-to-date (YTD) compared to the S&P 500’s 4.6% gain and the tech-heavy Nasdaq Composite Index’s 10.1% growth over the same period. 

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