Netflix Shares Sink 7% as Disappointing Forecast Weighs on Shares

Netflix shares dropped nearly 7% in morning trading Friday after the streaming giant posted better-than-expected results for its first quarter but offered a revenue outlook that fell short of Wall Street’s hopes.

The stock gave up $42.67, or 6.9%, to $567.89 in morning trading. It started the day up 30% since the start of the year, off about 4% from highs seen earlier this month.

Late Thursday, Netflix reported that its revenue for the quarter shot up 15% to $9.3 billion, helping profit soar 77% to $2.3 billion. The Los Gatos, California-based streamer credited a 16% jump in subscribers to 269.6 million and recent subscription price increases for helping it top analyst expectations for the quarter.

However, its forecast for revenue growth of 13% to 15% for the year came in below what analysts were hoping for.

J.P.Morgan analyst Doug Anmuth was among the analysts who thought the prediction was “lighter than expected,” and wrote in a note to clients that it “implies deceleration.”

However, Anmuth kept an “Overweight,” or “Buy” rating on the shares, with a $650 price target, implying he expects the stock to gain roughly 7% over the next year. Overall, he said the results were “very strong across the board,” and noted that Netflix’s efforts to crack down on customers sharing their passwords “has served as a significant contributor” to net adds” to adding new subscribers. He also expects price increases across international markets later this year.

But while Anmuth believes that Netflix still has room to grow in terms of shifting password borrowers to paid subscribers — with as many as 40 million potential targets– MoffettNathanson analyst Michael Nathanson is not quite as convinced the company’s subscriber growth is sustainable.

“Embedded within that is both the question of how much the company’s recent
reacceleration has been a password-sharing crackdown-driven pull forward, as well as the question of how many monetizable password sharers are left,” he wrote in a note to clients. “While one might be able to come to different answers to these questions, we do believe the lowest hanging fruit has already been captured.”

“Netflix has talked about expanding its crackdown into previously untouched mobile users, though it is unclear how large this opportunity is and remains to be seen whether this effort can deliver similar results,” he said.

Netflix said Thursday it plans to stop providing subscriber numbers and other metrics next year, which Nathanson said “can be read more cautiously that subscriber growth has indeed peaked – particularly in higher ARM markets – and a deceleration may lie ahead.” He kept a “Neutral” rating and $505 target price on the stock.

Most analysts were not as negative, with price target increases coming from Wells Fargo, Pivotal Research, Bernstein, Bank of America and Evercore, and an upgrade to “Buy” from “Hold,” at Needham.

Seaport Research analyst David Joyce noted that growth in Netflix’s ad-supported tier “is seemingly taking twice as long to achieve our advertising revenue estimates than we previously built in our model,” leading him to keep a “Neutral” rating on the shares, and adding, “we believe the company needs to prove
that it is executing on the advertising opportunity in order to justify” its current stock price.

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