Netflix’s disappointing subscriber gains spark ‘vigorous debate’ on the future

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Netflix Inc. was one of the biggest winners at the start of the pandemic, as people took shelter in place and turned to streaming content, but subscriber dynamics slowed more than a year after the start of the COVID-19 crisis.

The company’s history is perhaps more complicated than a simple case of a great COVID-19 pilot returning to earth as life returns to normal. by netflix

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the latest results and outlook, which exceeded expectations, are sure to spark a “vigorous debate” on how much of the Netflix slowdown can be attributed to the demand that was pulled forward at the start of the pandemic, and to what extent could be the result of other factors, according to Bernstein analyst Todd Juenger.

Netflix actions

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were down 6.8% in midday trading on Wednesday, enough to make the S&P 500 index

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bigger declines.

For his part, Juenger argues that Netflix’s subscriber issues are “primarily” a problem of accelerating demand during the pandemic which could see the balance of subscriber additions shift further to last year.

“If we are to believe the rate of ‘normal’ annual growth in this phase of the life cycle is 25 to 30 million [net additions], and FY20 delivered 37 million (i.e. + 8-9 million above “normal”), so maybe FY21 should deliver about 8-9 million below “normal” . The math of the envelope is “getting closer” to its new baseline subscriber forecast, which forecasts 21 million net additions this year, with most of that being weighted towards the second half of 2021.

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Thinking of the two-year period as a whole, Juenger wrote that 37 million net additions in 2020, as well as around 21 million net additions for 2021, would add up to 58 million, “near the high of the normal'”.

He admitted that the impact of the pandemic on the timing of subscriber additions may not have been the only reason for the recent slowdown, pointing to comments from Netflix’s management team on how the first half of the year of the year is expected to be lighter in content as the COVID-19 crisis disrupted production.

While Juenger believes Netflix’s value proposition is more about breadth of content than new blockbuster hits, he said Netflix’s gross additions “can undoubtedly be“ scaled up. ”At the same time, he said. “categorically rejects[ed]The idea that the disappointing growth in subscriber numbers and the outlook for Netflix indicate that the streaming market, or the company itself, is approaching maturity.

Juenger rates the stock to outperform but lowered its price target to $ 617 from $ 671.

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Stifel analyst Scott Devitt also attributed the recent trends to difficult comparisons to previous periods of strength due to a pandemic.

“We were waiting for Netflix to have the quarter in which the forward pull became evident and the 1Q: 21 results served as the moment,” Devitt wrote in a note to clients. He expects it to take three to nine months for Netflix to make abrupt comparisons to results fueled by the pandemic, after which investors could see “a period of several years in which the stock can fall. dial at a rate consistent with revenue growth or ~ 15% per annum, allowing for some multiple compression given rising operating margins. “

He improved the action to buy on hold while increasing his price target from $ 550 to $ 560.

Guggenheim’s Michael Morris has argued that a programming ramp in the second half of the year will be critical in causing membership trends to re-accelerate after the latest numbers served to “shake confidence”.

“We are confident in the opportunity for industry-wide global video streaming growth, but believe the results and guidance will call into question the ultimate long-term membership levels and the cost of acquisition and retention of members, ”he wrote. “That probably makes Netflix a ‘show me’ story at least until the second quarter results.”

Morris has a buy rating on the stock but lowered his price target to $ 600 from $ 625.

Laura Martin of Needham took a more pessimistic view, writing that the company faces competition concerns that could impact its market share.

“In our opinion, spending more money on entertainment content will not work against new streaming competitors who innovate in terms of price, aggregation, gender diversity (i.e. sports and entertainment). ‘live news), business models, etc. She wrote, while reiterating a note of underperformance. “We believe that successful entertainment content is necessary, but not sufficient, to compete in streaming wars in the future.”

At least 14 analysts have lowered their price targets for Netflix stock after the latest results, according to FactSet, while one analyst has raised his target. Of the 43 analysts tracked by FactSet who cover Netflix stocks, 32 have equivalent buy ratings, six have custody ratings, and five have sell ratings, with an average price target of $ 608.46. .

Shares of Netflix are down 12.2% in the past three months, although they are up 17.3% in a 12-month period. The S&P 500 was up 7.3% year over year and 51.6% year over year.

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