Netflix, Inc. (NFLX) Recap From The Sell-Side
Netflix, Inc. (NASDAQ: NFLX) reported Q3 EPS on Monday night and the company fell short of expectations by $0.03 while reporting a strong improvement in subscribers. Below is a recap of what the sell side actions and comments following the report.
Needham (Hold) - Analyst Laura Martin has no PT on the stock and comments on what worries her:
- competition is driving higher cash losses in 2018, driven by $8B of content spending plus $4.5B of working capital (and $17B of content obligations), which works against valuation multiple compression;
- price increases may negatively impact sub growth/churn levels in 4Q17 & '18;
- EU quotas (supported by Spain, France, Germany & Italy) that SVOD & OTT platforms must have 30% of their catalog be European content (up from 20%) plus talk of adding marketing spending quotas in 2018;
- NFLX will make 80 feature films in 2018 (up from 8 in '17), suggesting falling ROIC’s;
- higher marketing spending guidance for 2018 signals a shift from balance sheet growth to EBITDA and EPS compression; and
- original productions growing from 25% to 50% in 2020 adds risk."
Morgan Stanley (Overweight) - Analyst Ben Swinburne raises his PT to $235.00 (from $225.00) and believes the company remains on track to deliver 21.8 million global net adds for 2017. FY 2017 EPS estimate falls to $1.25 from $1.33, FY 2018 EPS estimate falls to $2.66 form $2.68 and FY 2019 EPS estimate rises to $4.37 from $4.19. The analyst comments on the valuation "Our new $235 price target (vs. prior $225) implies ~12.5x our 2027E EBITDA discounted back to mid-year 2018."
UBS (Buy) - Analyst Doug Mitchelson raises his PT to $237.00 (from $225.00) and comments "We continue to believe that Netflix's dramatic lead in scale and execution are underappreciated relative to competition and content concerns, while costs and capital are a function of management investing in success to widen the moat as others begin to address what is still a nascent marketplace when considered globally (even in the U.S., streaming is sub-30% of video consumption; overseas dramatically less)." The valuation is based on a DCF model with 11.5% WACC and 3% growth. The analyst notes that shares are trading at 23x 2021 estimated EPS.
Cantor Fitzgerald (Overweight) - Analyst Kip Paulson raises his PT to $235.00 (from $205.00) and likes the continued strength on original programing and international subscribers. FY 2017 EPS estimate rises from $1.22 to $1.25 and FY 2018 EPS estimate falls from $2.02 to $1.64. The analyst also comments on his valuation model "We're increasing our estimates to reflect stronger-than-expected sub growth and the roll-forward of our DCF-derived PT to 2018. Our model assumes 260M streaming subs by 2025 (including 188M int'l)."
FBR Capital (Neutral) - Analyst Barton Crocket raises his PT to $207.00 (from ($172.00). The analyst believes the international upside outweighs the domestic miss and FCF burn. FY 2017 EPS estimate is for $1.24 and FY 2018 EPS estimate is for $1.98. Addressing the new PT, the analyst comments "With such a hefty cash burn, we worry about the equity fallout of decelerating growth, which is possible at any point, versus such tough comps. However, positive momentum allows us to value international more constructively: 2x the DCF value of the U.S., taking our SOTP price target from $172, to $207."
Wells Fargo (Outperform) - Analyst Ken Sens keeps his PT at $230 and notes the modestly increasing revenues with a inline guide on subscribers. The analyst expects content spending to continue to be efficient and does not expect a content hole in light of the Walt Disney (NYSE: DIS) and other effects to start selling away from NFLX. FY 2017 EPS estimate rises to $1.26 (from $1.18) and FY 2018 EPS estimate rises to $2.31 (from $2.08).
Goldman Sachs (Buy) - Analyst Heath Terry likes the fact content is driving net adds and APRU is pushing higher. The analyst raises his PT to $250.00 (from $235.00). Terry suspects the company is building an unmatchable global entertainment platform regardless of the cash burn and premium valuation. The valuation is based on 55x 2018 estimate EV/EBITDA. FY 2017 EPS estimate rises to $1.25 (from $1.18), FY 2018 EPS estimate rises to $2.27 (from $2.00) and FY 2019 EPS estimate rises to $3.97 (from $3.67).
Jefferies (Hold) - Analyst John Janedis raises his PT to $190.00 (from $180.00) and likes the build up of international subscribers. The PT is based on SOTP analysis. FY 2017 EPS estimate rises to $1.25 (from $1.23), FY 2018 EPS estimate rises to $2.11 (from $2.08) and FY 2019 EPS estimate falls to $3.17 (from $3.26).
BMO Capital (Market Perform) - Analyst Dan Salmon raises his PT to $205.00 (from $195.00) and suspects that while the company cash burn is elevated there may be some relief in the "welcoming" debt markets. The PT implies 48x 2018 estimate EV/EBITDA of 37x on FY 2019 estimate. FY 2017 EPS estimate rises to $1.35 (from $1.24), FY 2018 EPS estimate rises to $2.47 (from $2.41) and FY 2019 EPS estimate rises to $3.38 (from $3.36).
BofA/Merrill Lynch (Buy) - Analyst Nat Schindler liked the strong Q3 sub growth and realized the company is spending money to make money but sees an elevated cash burn in 2018. The analyst also notes that price elasticity is not a major concern currently. The PT is raised to $255.00 (from $199.00) and is based on a peak penetration sum-of-the-parts analysis which discounts back future EPS at peak penetration by 10%. FY 2017 EPS estimate falls to $1.50 (from $1.53), FY 2018 EPS estimate falls to $2.13 (from $2.61) and FY 2019 EPS estimate falls to $3.08 (from $5.19).
Keybanc (Overweight) - Analyst Andy Hargreaves raises his PT to $230.00 (from $206.00) and notes pricing power appears to be growing and sees greater NT earnings potential along with potential for a longer period of average growth than he previous suspected. FY 2017 EPS estimate rises to $1.24 (from $1.22) and FY 2018 EPS estimate rises to $2.25 (from $2.19). The valuation multiple is raised to 18x FCF from 15x.
Pivotal (Buy) - Analyst Jeff Wlodarczak raises his PT to $270.00 (from $200.00) and comments "we raised our ARPU growth expectations materially (including ’22 U.S. streaming ARPU from $11.77 to $12.93 and international ARPU from $9.85 to $10.92) which helped drive our steady state EBITDA margin from 2530%, which combined with a move from a YE’17 to YE’18 target price drove a $70 increase in our target to $270." FY 2017 EPS estimate rises to $1.25 (from $1.05) .
RBC Capital (Outperform) - Analyst Mark Mahaney raises his PT to $250.00 (from $210.00) and comments secular demand for Internet TV is ramping up rapidly and NFLX is positioned extremely well to benefit. FY 2017 EPS estimate rises to $1.24 (from $1.17), FY 2018 EPS estimate rises to $1.88 (from $1.77) and FY 2019 EPS estimate rises to $3.08 (from $3.06). Regarding the valuation, Mahaney comments "In order to reach our price target, we use a 25x P/E multiple on our Domestic Streaming GAAP EPS, a 10x multiple on our Domestic DVD GAAP EPS, and an 8x P/S multiple on our International Streaming revenue."
Stifel (Buy) - Analyst Scott Devitt raises his PT to $235.00 (from $230.00) and likes the bright outlook for subscriber numbers. FY 2017 EPS estimate rises to $1.25 (from $1.17) and FY 2018 EPS estimate falls to $2.58 (from $3.58). Addressing the valuation Devitt comments "We use a DCF approach to arrive at our $235 target price, utilizing a perpetual growth rate of 4.0% and discount rate of 10.5%."
JPMorgan (Overweight) - Analyst Doug Anmuth raises his PT to $242.00 (from $225.00) and notes the company virtuous cycle continues and likes the strong execution on content and pricing changes. FY 2017 EPS estimate rises to $1.26 (from $1.24), FY 2018 EPS estimate falls to $1.698 (from $2.05) and FY 2019 EPS estimate rises to $3.42 (from $3.39). Speaking to the valuation the analyst comments "We are raising our Dec’18 PT from $225 to $242 based on our sum-of-the-parts analysis, with a 15x multiple on 2019 US streaming EBITDA of $2.3B, 11x multiple on 2018 Int’l streaming revenue of $7.4B, & 5x multiple on 2019 US DVD EBITDA of $143M."
Piper Jaffray (Overweight) - Analyst Mike Olson likes the strength in the international markets which he believes is driving optimism for NFLX. The analyst raises hit PT to $240.00 (from $215.00). FY 2017 EPS estimate rises to $1.24 (from $1.23) and FY 2018 EPS estimate rises to $2.01 (from $1.92). Olson comments on his valuation method: "We apply slightly higher multiple of 45x our upwardly revised 2020E EPS of $6.45 (previously 42x), discounted back 2 years at 10% (same discount period & rate). We believe our multiple is realistic given we expect >70% EPS growth in 2020. In our view, a multiple that is a discount to growth is reasonable as EPS growth should continue to decelerate as the company moves beyond 2020, with 2021-2022 EPS growth more likely to land in the 30-60% range."