Netflix faces new test after US$46bil rally

Wall Street looking for 6.3 million more subscribers in Q2

NEW YORK: Netflix Inc will get a chance next week to validate the US$46bil added to its market value since the company’s blowout earnings report in April.

The main question hanging over Netflix’s second-quarter results – much like the first – is whether the company can add enough streaming subscribers to satisfy investors, whose bullish bets have made the stock the second-best performer in the S&P 500 Index this year.

Netflix silenced critics in the first quarter, adding almost one million more subscribers than analysts projected.

But analysts have made that task more difficult in recent months by raising subscriber estimates, even as some question the stock’s valuation.

“It’s possible expectations have gotten ahead of themselves,” Macquarie analyst Tim Nollen said in a research note ahead of the results. “It may take a solid beat to keep the stock momentum going.”

Nollen has the equivalent of a “buy” rating on the stock and said he’s not going against Netflix, even though “expectations are sky-high” heading into Monday after- noon’s report.

Growth is critical for the television- and movie-streaming company, whose success in adding subscribers has fuelled a surge in market value that now exceeds Walt Disney Co by almost US$19bil.

So far Netflix has proven it can keep finding new customers who are willing to pay as much as US$13.99 a month in the US to watch original shows like “Stranger Things” and “13 Reasons Why.”

Wall Street is looking for second-quarter total subscriber net addition of 1.22 million in the US and 5.08 million internationally, according to the average of five estimates compiled by Bloomberg News.

That compares with Netflix’s forecast of 1.2 million domestically and five million globally on April 16.

The company will also give its outlook for the third quarter. Analysts expect total net subscriber additions of 833,000 in the U.S. and 4.75 million for international, according to the average of four estimates.

All of this growth has come at great expense as the company continues to invest in programming. Netflix said last quarter that it plans to spend as much as US$8bil on content in 2018.

Most of Wall Street has endorsed Netflix’s growth formula. Of the 46 analysts covering the company, more than half have a “buy” rating and only three recommend selling the stock, according to data compiled by Bloomberg. But the 115% rally in 2018 has given some bulls reason to pause.

Netflix’s share price “reflects little in the way of any risks to the downside from competition,” as well as cash burn and the cost of programming, UBS analyst Eric Sheridan said in a research note on Wednesday.

He downgraded the stock to “neutral” from “buy”, saying he doesn’t expect “pronounced upside” in the second-quarter results relative to prior periods.

Others are sticking to their guns. At least four analysts have bumped their price targets to UJS$500 or above, implying at least 21% upside from the last closing price.

Goldman Sachs and Morgan Stanley, whose targets are among the highest on Wall Street, said on Thursday that they expect original content and subscriber additions will continue to push the stock higher. — Bloomberg