Netflix Down 6% On Weak Subscriber Additions; RBC Says Buy

Shares in Netflix (NFLX) pulled back 5.7% in Tuesday’s after-hours trading after the company’s soft global streaming subscriber additions disappointed investors.

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Specifically, Netflix reported Q3 GAAP EPS of $1.74 which fell short of Street expectations by $0.39. However revenue of $6.44B surged 22.7% year-over-year and beat consensus by $60M, with operating income rising to $1.315B.

Meanwhile net subscriber additions of 2.20M fell short of guidance of 2.5M and the Street at 3.6M, with Average Monthly Revenue per Paying Sub of $10.95. For the fourth quarter, NFLX is forecasting 6.0M paid net additions vs 8.8M in Q4‘19. It is also looking for global streaming paid memberships of 201.15M (up 20.4% Y/Y).

“As we have highlighted in our recent investor letters, we believe our record first half paid net additions would result in slower growth in the back half of this year. If we achieve our forecast, it will put us at a record 34m paid net adds for 2020, well above our prior annual high of 28.6m in 2018” NFLX stated.

Operating Margin expanded 170bps Y/Y to 20.4% in the September quarter, above guidance of 19.7%, driven by continued marketing efficiency and more muted content spend given the production delays.

At the same time, Netflix’s financial position is improving: “With $8.4B in cash on our balance sheet at the end of the quarter plus our $750M credit facility (which is undrawn), our need for external financing is diminishing… As indicated last quarter, we don’t have plans to access the capital markets this year.”

Indeed, for FY20 Netflix is still on track for $2B+ free cash flow, with FY21 guided to -$1B to break-even, as content spend ramps back.

Following the results, RBC Capital’s Mark Mahaney reiterated his Netflix buy rating while bumping up his price target from $610 to $630. “All in, fundamentals were solid – ex-FX Global Streaming Revenue decelerated from 32% in Q2 to 26% in Q3, while Op Margins rose 170 bps Y/Y” the analyst commented.

“Though the Q3 Sub Adds were disappointing, we believe the NFLX Long Thesis is well intact” he added. Mahaney notes that production is pretty much back to normal and the 2021 content slate will be very robust. Plus “consumers are increasingly purchasing Streaming Bundles of 2 or 3+ services, and Netflix is almost always one of those services.” (See Netflix stock analysis on TipRanks).

Overall, the Street has a cautiously optimistic Moderate Buy consensus on Netflix. The average analyst price target stands at $570 (8% upside potential), with shares currently up 62% year-to-date.