Shares gained ground on Monday as analysts raised expectations for the company’s two key growth initiatives ahead of its June quarter earnings report on Wednesday.
Just over a year ago, Netflix (ticker: NFLX) founder, chairman and former CEO Reed Hastings shocked the streets when he disclosed the company was planning to launch an ad-supported level of streaming and that it was considering a crackdown on password sharing. Netflix has made progress on both fronts.
Analysts see metrics boost revenue and subscriber growth, and look forward to updates on both fronts later this week. The call for post-earnings analysts will also likely include an in-depth discussion of the impact on film and television production of ongoing industrial action. Members of the Hollywood Actors Union went on strike Thursday, joining screenwriters who were already on the picket line.
Netflix forecast revenue of $8.2 billion for the June quarter, up 3.4% from a year ago, with earnings of $2.84 per share, up from 3 $.20 a year ago, and subscriber growth roughly in line with the 1.75 million added in the first quarter. But expectations for subscriber growth are rising.
Deutsche Bank analyst Bryan Kraft reiterated his buy rating on Netflix shares on Monday, while raising his price target on the stock to $475 from $410. He’s optimistic about the company’s new ad-supported subscription tier, priced at $6.99 per month, and a move to reduce password sharing.
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Kraft believes advertising will add $400 million in revenue this year, $1.3 billion next year and $2.3 billion in 2025, rising to $6 billion by 2030. The Word Crackdown password, it says, is expected to add $900 million in revenue this year, $3.4 billion next year and $4.5 billion in 2025.
While Kraft admits the valuation case has become more difficult for Netflix shares, with the stock already up 53% for the year to date, he adds that Netflix is ”one of the few stories of growth in earnings and free cash flow in media and communications”.
Loop Capital analyst Alan Gould also raised his price target on the stock to $425 on Monday from $330, although he maintains a Hold rating. Gould sees labor issues in Hollywood bolstering the company’s competitive position, given its stock of unreleased content and global production capabilities. But with the stock up more than 30% since the last earnings report, he sees the risk and rewards heading into the quarter as roughly balanced.
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Evercore ISI analyst Mark Mahaney maintains an outperform rating and $400 target price on Netflix shares, but he issued a ‘tactical underperformance’ call on the stock, on the theory according to which buy-side subscriber growth expectations reached the range of four million to five million for Q2, and five million to seven million for Q3. He thinks these high expectations increased the chances of a negative surprise in the second quarter.
On Monday, shares of Netflix were up 2.2% to $451.60.
Write to Eric J. Savitz at eric.savitz@barrons.com
