The Ratings Game: Netflix’s underwhelming subscriber gains spark ‘vigorous debate’ about the future


Netflix Inc. was one of the biggest winners in the early days of the pandemic, as people sheltered in place and turned to streaming content, but subscriber momentum has slowed more than a year into the COVID-19 crisis.

The company’s story may be more complicated than simply a case of a COVID-19 high flyer coming back to earth as life returns to normal. Netflix’s

latest results and outlook, which underwhelmed expectations, are sure to spark “vigorous debate” about how much of Netflix’s slowing traction can be attributed to demand that was pulled forward in the early days of the pandemic, and how much might be the result of other factors, according to Bernstein analyst Todd Juenger.

Shares of Netflix

were off 6..8% in Wednesday midday trading, enough to make them the S&P 500 index’s

biggest decliners.

For his part, Juenger argues that Netflix’s subscriber problems are “mostly” a problem of accelerated demand during the pandemic that could see the balance of subscriber additions shifted more toward last year.

“If one believes the pace of ‘normal’ annual growth in this life-cycle phase is 25-30 million [net additions], and FY20 delivered 37 million (i.e. +8-9 million above ‘normal’), then perhaps FY21 should be expected to deliver roughly 8-9 million below ‘normal.’” Juenger conjured, while noting that this back-of-the-envelope math “comes close” to his new base-case subscriber forecast, which calls for 21 million net additions this year with the bulk of that weighted toward the second half of 2021.

Opinion: There is a new normal for Netflix, and that is not necessarily a bad thing

Thinking about the two-year period on the whole, Juenger wrote that 37 million net additions in 2020 along with an estimated 21 million net additions for 2021 would yield 58 million in total, “near the high end of ‘normal.’”

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

While Juenger thinks Netflix’s value proposition is more about the breadth of content than new blockbuster hits, he said that Netflix’s gross additions “can undoubtedly be ‘hit boosted.’” At the same time, he “categorically reject[ed]” the idea that Netflix’s disappointing subscriber growth and outlook signal that the streaming market, or the company itself, is nearing maturity.

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

See also: Your streaming subscriptions reshaped Disney and turbocharged Netflix — now comes making more money off you

Stifel analyst Scott Devitt also attributed the recent trends to tough comparisons relative to earlier periods of pandemic-driven strength.

“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 wrote in a note to clients. He expects that it will take Netflix three to nine months to work through steep comparisons to the pandemic-fueled results, after which investors could see “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.”

He upgraded the stock to buy from hold while boosting his price target to $560 from $550.

Guggenheim’s Michael Morris argued that a programming ramp in the second half of the year will be key to driving a reacceleration in membership trends after the latest numbers served to “shake confidence.”

“We are confident in the industry-wide global streaming video growth opportunity but believe results and guidance will call ultimate long-term member levels and the cost to acquire and maintain members into question,” he wrote. “This likely makes Netflix a ‘show me’ story at least until 2Q earnings.”

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

Needham’s Laura Martin had a more downbeat take, writing that the company faces competitive issues that could impact its market share.

“In our view, spending more money on entertainment content won’t work against new streaming competitors who are innovating with price, bundling, genre diversity (ie, live sports and news), business models, etc.,” she wrote, while reiterating an underperform rating. “We believe that hit entertainment content is necessary, but not sufficient, to compete in the streaming wars going forward.”

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

Netflix shares have declined 12.2% over the past three months though they’re up 17.3% over a 12-month span. The S&P 500 has risen 7.3% over three months and 51.6% over 12 months.

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