Netflix, Inc. (NASDAQ:NFLX) stock received several price target upgrades after the recent earnings.
Shares of Los Gatos, California-based video streaming giant, Netflix Inc (NASDAQ:NFLX) have been trending downwards after the company reported a miss on its subscriber numbers in its latest earnings report. Netflix stock is down by more than 5% since the earnings report, closing yesterday's trading session $139.76 a share, below the psychologically crucial $140 level for the first time in more than a month. Driven by the strong bearish sentiment, Netflix stock also breached a technically important support line. For the first time since the end of September, NFLX stock closed below the 50-day moving average line.
The 50-day moving average line has provided strong support to Netflix Inc stock on multiple occasions in the last six month. In the last one month, Netflix stock has tested the 50-day moving average line on two occasions. The stock had tested the 50-day support line on March 27th when it made an intraday low below the support line. However, the stock bounced back after that. Netflix Inc stock again tested the support line few day ahead of the earnings. While the 50-day moving average continued to provide support to Netflix Inc stock going into the earnings, the miss on the subscriber numbers resulted in Netflix Inc stock making a bearish crossover.
Another technical indicator, Moving average convergence divergence (MACD) is also about to cross below the "zero centerline", which is a bearish indicator. Unless Netflix stock manages to climb back up above the 50-days moving average in next couple of trading days, it is likely to face strong resistance from the 50-days moving average.
Netflix Inc nearing 100 million subscriber numbers.
While technicals indicate near-term resistance for Netflix Inc stock, fundamentals remain strong. In its latest quarter, Netflix reported a beat on EPS while revenues came in line. Net profit increased from $28 million in Q1 2016 to $178 million. Netflix reported an EPS of $0.4 against analysts estimates of $0.37 while revenues came at $2.64 billion. However, Netflix missed on the subscriber numbers. Netflix reported that it had acquired in 1.42M net subscribers in the U.S. during Q4. Analysts were expecting 1.59M net subscriber additions. Globally, Netflix brought in 3.53M new subscriber against analysts consensus of 3.90M. The total Netflix membership count at the end of the quarter was 98.75M. For the current quarter ending in June, Netflix said that they expect to add 3.2 million subscribers globally, split between 600k in the domestic market (against analyst estimate of 360) and 2.6 million internationally. The better than expected subscriber growth will be driven by strong content slate in Q2. Netflix had pushed the release of "House Of Cards" to the Q2, which is likely to drive subscriber growth. However, this will also push up the costs in Q2.
On the profitability front, Netflix reported an operating margin of 9.4%, compared to 2.5% operating margin it had reported in last year same quarter and 6.2% in the previous quarter. Netflix operating margin have improved in each of the last four quarters. However, due to higher content and marketing costs, Netflix expects Q2 operating margin to come around 4.4%. US contribution margin came in around 41.2%, higher than 35% it had reported in the same quarter last year and for the first time, Netflix reported a positive contribution from the international market. However, it expects both the domestic and international contribution margins to decline next quarter.
Netflix continues to burn cash. Net cash flow from operations came in at -$344 million while free cash flow came in at -$433 million. Free cash flow burn in the current quarter is more than 60% higher than the cash burn in the same quarter last year. Netflix Inc is likely to continue burning its cash due to increasing content costs. Management expects sustained negative FCF for many years in order to fuel the company’s growth. Negative FCF has been one of the biggest concerns for analysts and investors alike. It is one of the main reason why Wedbush Securities’s Michael Pachter has an underperform rating on Netflix Inc stock with a price target of $73.
Netflix stock remains a long-term buy.
Despite the miss on subscriber numbers and resistance in the short run, Netflix stock remains a long-term buy. It is true that NFLX stock valuation and the huge cash burn could force investors to think twice. However, the company has top-notch content and subscriber growth is likely to continue. Netflix Inc stock received several price target upgrades after the earnings. Raymond James’s analyst Justin Patterson upped the price target to $165 on improving contribution from the international market. To quote him:
1) the major expansion period is over (i.e., less incremental drag); 2) marketing leverage is a near-term driver; 3) early Int’l markets are already profitable (>$500M in 2016); and 4) more recent markets should benefit from narrowing losses. We continue to recommend shares for margin expansion and earnings growth potential.
Apart from Raymond James, analysts at Canaccord Genuity and Instinet also raised their price targets for Netflix Inc stock. Bank of America Merryl Lynch upped its price target to $184, which means an upside of more than 30%, as it expects new and original content to drive subscriber growth. All in all Netflix stock looks a good long term buy.
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