Netflix
In his fourth quarter earnings letter, pointed out that the company’s stock has returned more than 50,000% since their IPO in May 2002. That is about 125 times higher than the 400% that the
S&P 500
has registered for the same period.
Analysts fall over themselves to say there’s more where that comes from. Shares were up 14.6% Wednesday morning to $ 574.83 and hit a record high of $ 577.77.
The streaming giant delivered what is likely to be one of the rare quarterly earnings reports to have lasting effects on investors’ long-term thinking on Tuesday. In particular, Netflix made it clear that it has now amassed enough subscribers – more than 200 million – with enough average monthly earnings of each (just over $ 11) to support the company on its own. Netflix expects to break even in cash flow in 2021, even with a promise to release at least one new movie every week until the end of the year and beyond.
The company, which has about $ 16 billion in debt on its books, said it can now finance operations without borrowing. Netflix will pay off $ 500 million in debt to be paid in cash next month. After that, for the first time since 2011, it could use excess money to buy back shares.
The cash flow comments no doubt baffled those who were gloomy about the stock, saying the company would never have enough self-generated cash to support its ambitious production schedule. Those bears were all wrong there, and more.
For example, Netflix added 8.51 million net new subscribers in the quarter, passing both its own 6 million add-in forecast and more optimistic Wall Street estimates. That’s an impressive rebound after a disappointing 2 million new subscribers in the third quarter.
There was concern that the company’s massive growth earlier this year, as the pandemic shutdown occurred, was stealing subscribers from the future. Instead, growth appears to have simply accelerated. Netflix expects to add an additional 6 million subscribers in the first quarter.
The naysayers also thought Netflix would suffer from the rollout of new streaming services like
Disney
+, HBO Max, Peacock and
Apple
TV +. But instead of hurting Netflix, the addition of new streaming services seems to have amplified the shift among consumers away from the real loser in this equation: the traditional cable and satellite pay-TV services.
Both the company’s reported results and forecasts for the March quarter were solid. For the December quarter, Netflix posted sales of $ 6.6 billion, in line with estimates, with earnings of $ 1.19 per share, lower than its own forecast of $ 1.35 per share, largely due to no -cash exchange charges related to the euro-denominated debt.
For the March quarter, Netflix sees revenue of $ 7.1 billion, close to the previous Wall Street analyst consensus call of $ 7 billion. Management expects earnings of $ 2.97 per share, well above the Street’s forecast of $ 2.10. The gross profit margin in the March quarter will increase to 25%, from 16.6% a year ago and 14.4% in the fourth quarter, according to Netflix.
At least 17 analysts raised their price targets for Netflix shares on Wednesday. Previously cautious analysts at UBS and Wells Fargo threw in the towel and increased the stock to Buy and Overweight respectively.
Morgan Stanley analyst Benjamin Swinburne reiterated his Overweight rating, raised his target price from $ 650 to $ 700 and was delighted to see his primary thesis on Netflix. “We have long believed that as the company grew and the transition to self-produced content progressed, this business would evolve towards a sustained and substantial annual free cash flow,” he wrote. “That moment has come.”
But Swinburne noted that the shift to positive free cash flow does not indicate a business maturing. In fact, he thinks the company’s spending on content is likely to increase by more than 40% in 2021 from its 2020 levels due to the pandemic, keeping it 20% higher than in 2019. Meanwhile, he sees revenues increase by about 20%. in 2021.
“In particular, we expect substantial incremental investments in film production and foreign local originals to be made in the coming years,” he wrote.
Morgan Stanley’s analyst said Netflix is one of the world’s largest investors in entertainment programming and could become the clear No. 1 in a few years. In the longer term, he says, it wouldn’t be surprising if Netflix moves more openly into new markets, such as live sports, or if it requires a “more opportunistic approach” to acquisitions. But for the time being he sees that extra money is going to the shareholders.
Pivotal Research analyst Jeffrey Wlodarczak reiterated his Buy rating, raising his target price from $ 660 to $ 750, the highest on the street. Among other things, the analyst said the company got more subscribers than expected in all major regions, including a net increase of 900,000 in the US and Canada, where he expected only 375,000 net additions. He says the data suggests the ultimate penetration rate for Netflix services globally could be higher than investors previously expected.
“Netflix offers consumers an increasingly engaging unique entertainment experience on virtually any device, with no advertising for a still relatively low cost,” Pivotal’s analyst wrote. “The company appears to be operating in a positive cycle as the larger their subscriber base grows, the more they can spend on original content, increasing the potential target market for their service and increasing their ability to accommodate future price increases and removing barriers to access, fueled by sustained material increases in broadband availability / speeds worldwide and the fact that on most terrestrial net neutrality rules, Netflix can piggyback almost for free on the significant investment to increase broadband speeds made by telecom companies. ”
Bernstein analyst Todd Juenger reiterated his Outperform rating, raising his target from $ 591 to $ 671. In his note, Juenger compared Netflix to Disney and noted that even as Disney is suspending its dividend, Netflix is considering a buyback. He noted that Disney + has less than half of the subscribers Netflix has, at about half the average revenue per user. He also thinks Disney has less consumer appeal and pointed out that Disney is dealing with negative free cash flow for up to five years, while Netflix is making cash flow positive.
Juenger said Netflix’s results confirmed many elements of his bullish thesis on the stocks. The company added 37 million subscribers in 2020 and it believes they will have a high lifetime value. He said turnover was lower both consecutively and year-over-year, and engagement per member – the amount of time spent watching Netflix content – had increased by double digits across all regions. The company was able to raise prices; it stimulates investment in content; average revenue per user is increasing in the Asia-Pacific region; free cash flow is positive; and the company deducts debt, plans stock repurchases and subscriber numbers in its home market, he noted.
UBS analyst Eric Sheridan increased his rating on the stock to buy from Neutral, while raising his target price from $ 540 to $ 650. He thinks the big takeaways of the announcement were that Netflix showed strong global subscriber growth, even as competition intensified, and after robust growth in the first half of 2020. At the same time, he noted that the company has investments in content and has laid out a strong, multi-year story for its margins and free cash flow.
Sheridan views Netflix as “the streaming media category leader” and says its “core competencies in both content and technology should create a flywheel for higher subscriber growth and consumption, thus leveraging spending on content is stimulated. “
Write to Eric J. Savitz at [email protected]