Netflix (NFLX) Plunges Following Q1 Sub Miss, But One Analyst Sees Chance to Turn Bullish

April 21, 2021 7:14 AM EDT
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Shares of Netflix (NASDAQ: NFLX) are down more than 8% in pre-open Wednesday after the company reported a lower-than-expected number of new subscribers it added in the first quarter.

NFLX said it added 3.98 million global paid net subscribers, marking a big miss on the 6.2 million new subscribers the market analysts were expecting. The company was expecting to add 6 million new subs in Q1.

Still, Netflix said it made a profit of $3.75 per share to top $2.97 the Street was calling for. Revenue also topped estimates - $7.16 billion vs $7.13 billion. NFLX saw its average revenue per membership (ARPM) rise by 6% in Q1.

“Revenue grew 24% year over year and was in line with our beginning of quarter forecast, while operating profit and margin reached all-time highs. We finished Q1’21 with 208m paid memberships, up 14% year over year, but below our guidance forecast of 210m paid memberships,” the company said in a statement.

“We believe paid membership growth slowed due to the big Covid-19 pull forward in 2020 and a lighter content slate in the first half of this year, due to Covid-19 production delays. We continue to anticipate a strong second half with the return of new seasons of some of our biggest hits and an exciting film lineup. In the short-term, there is some uncertainty from Covid-19; in the long-term, the rise of streaming to replace linear TV around the world is the clear trend in entertainment.”

The production delays caused content amortization to “only” grow by 9.5% YoY, compared to 17% in a year-ago period. A decrease in the content spending allowed for a 10% increase in the operating margin, which now sits at the all-time high of 27%.

For Q2, Netflix projects to add only 1 million new subscribers compared to 10 million added last year and well below the 4.4 million expected by analysts. The weaker-than-expected numbers aren’t a result of the stronger competition, the company said.

“We don’t believe competitive intensity materially changed in the quarter or was a material factor in the variance as the over-forecast was across all of our regions.”

Still, Netflix said it expects the content production to accelerate in the second half of the year.

Morgan Stanley analyst Benjamin Swinburne reiterated an “Overweight” rating on NFLX but lowered the price target to $650.00 per share from $700.00 on weaker subs figures.

“Bracing for a challenging 1H21 due to tough YoY compares, the results appear to be softer than expected. With 1Q21 done, Netflix expects 1H21 net additions of +5mm vs. our prior estimate of +9.5mm. This appears primarily a gross additions issue, as churn is down YoY and engagement up YoY,” the analyst wrote in a note sent to clients.

“In other words, after 2020's pull forward of growth, gross activations are down meaningfully in 1H21. This appears to be exacerbated by a 2H21-heavy content slate as a result of production delays tied to COVID. Stepping back, wethink it is morelikelythat the2021 moderation of net additions relative even to 2018/2019 levels is pandemic-driven (pull forward + production delays) rather than a sign of a suddenly maturing product. Moreover, post these results, both the 2021 expectations and valuation support a positive risk/reward if we are correct.”

Unlike Swinburne, Stifel analyst Scott Devitt moved to upgrade Netflix to “Buy” from “Hold” as paid net additions should re-accelerate in the second half of the year.

“Netflix is a globally dominant company in media distribution that should experience mid-teens intermediate-term revenue growth with rising operating margins and significant free cash flow generation. We have been waiting for Netflix to have the quarter in which the pull forward became evident and the 1Q:21 results served as that moment,” Devitt said in a note.

“We expect a 3- to-9 month period of working through the remaining COVID comp issues followed by a multi-year period in which the stock can compound at a rate consistent with revenue growth or ~15% per annum, allowing for some multiple compression given rising operating margins. Netflix is a blue-chip consumer technology company that should be accumulated on the share price weakness created by COVID comps against what remains a compelling long-term growth story, in our view,” added Devitt, who raised the price target on NFLX to $560.00 from $550.00.

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