Shares of Netflix (NFLX) are on the rise following record subscriber growth in the fourth quarter, helped by new content. While several Wall Street analysts raised their price targets and reiterated buy-equivalent ratings on the stock following the company's quarterly report, Buckingham analyst Matthew Harrigan downgraded Netflix to Neutral, citing valuation and concerns over the company's cash burn.
RESULTS: Last night, Netflix reported fourth-quarter earnings per share of 41c, in-line with consensus, on revenue that was also roughly matched the average view of analysts. The company also reported Q4 streaming net additions of 8.33M members. Netflix sees Q1 streaming net additions of 6.35M members. For the first quarter, the company foresees EPS of 63c and revenue of $3.68B. Additionally, the company said it sees negative free cash flow of $3B-$4B in 2018 as it continues to invest in programming.
ANALYSTS UP TARGETS: Following the streaming giant's report, several Wall Street analysts raised their price targets for Netflix. Goldman Sachs analyst Heath Terry increased his target to $315 from $250, citing the significant upside to both subscriber additions in Q4 and guidance for membership in Q1. He believes this reflects the growing correlation between content spending and subscriber growth. Terry reiterated a Buy rating on the stock. His peer at Bernstein also raised his target for Netflix to $302 from $230, while reiterating an Outperform rating on the shares. Analyst Todd Juenger said he believes the Netflix "flywheel" is working "brilliantly" as having the most subscriptions means it can invest the most in content, which in return drives more subscriptions. This will lead to a company that will be "massively bigger" and more profitable in the future than what the market is pricing in today, he added. RBC Capital, Credit Suisse, Oppenheimer, BMO Capital, KeyBanc, UBS, Wells Fargo, JPMorgan, Loop Capital, Citi, Barclays and Piper Jaffray also upped their respective price targets on Netflix shares this morning.
MOVING TO THE SIDELINES: Conversely, Buckingham analyst Matthew Harrigan downgraded Netflix to Neutral from Buy, while raising his price target to $257 from $251. The analyst acknowledged that he is confident in Netflix's position as a global streaming leader, with new entrants like Disney (DIS) more apt to complement than replacements. However, he pointed out that continued share momentum depends on market confidence that Netflix's guided $3B-$4B in negative 2018 free cash flow will generate superior investment returns. Meanwhile, his peer at Wedbush raised his price target on the stock to $110 from $93 but reiterated an Underperform rating on the name. Analyst Michael Pachter told investors he expects Netflix to burn cash to fund content acquisition for many years, notwithstanding the fact that it has increased prices three times while its cash burn continues to grow. The analyst also noted that he believes international profits may remain elusive due to competition for content and subscriptions, and the price increases could cause a deceleration in subscriber growth.
PRICE ACTION: In morning trading, shares of Netflix jumped almost 11% to $252.39.
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