Netflix Pressured After Soft Subscriber Guidance, Confirming Gaming Plans

Reiterating an Outperform rating on the name, Evercore ISI analyst Mark Mahaney lowered the firm's price target on Netflix to $635 from $655. Netflix shares declined almost 20% from early to mid-2021 and have been underperforming the market year-to-date, but Mahaney now believes "shares will begin to materially outperform" following the second quarter "clearing event." Mahaney named Netflix a Top 3 Mega Cap Long, after Amazon (AMZN) and Uber (UBER).

GAMES 'A MISSTEP': Commenting on the company's quarterly results, Wedbush analyst Michael Pachter told investors that after a stellar 2020 that saw dramatic subscriber growth and a reversal of negative free cash flow trends it exhibited since 2012, Netflix delivered only limited subscriber growth and returned to negative free cash flow in the second quarter. The analyst expects further consolidation among entertainment companies, which suggests to him that less content will be available to Netflix going forward. He views Netflix's "ill-advised foray" into games as an acknowledgment that the video content pipeline is flowing more slowly, with content costs continually on the rise. That said, assuming that Netflix can expand its content spending at a slower rate than its revenue growth, it is likely that the company can deliver sustainable free cash flow growth, Pachter contended. The analyst has an Underperform rating and a price target of $342 on the shares.

PRICE ACTION: In Wednesday morning trading, shares of Netflix have dropped almost 4% to $511.34.

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