“The truth is people want to spend less time at home, which is a headwind for retention and price increases,” Loup Investors analyst Gene Munster says
Netflix just reported one of its most impressive quarters ever, with the streaming giant revealing it added 15.8 million new subscribers during Q1, smashing its previous record for net subscriber additions in a single quarter. And yet, on Wednesday, investors are essentially shrugging at the results, with the company’s stock price dipping to 2% to $425 per share.
Well, analysts tend to follow the Wayne Gretzky axiom: Skate to where the puck is going, not to where it is. In this case, investors and Wall Street analysts are holding back because Netflix’s huge Q1 is already banked — and they’re now looking ahead to the rest of 2020. Stifel analyst Scott Devitt, in a note to clients on Wednesday titled “As Good As It Gets,” championed Netflix’s huge subscriber gains, but said he expects its momentum to tail off as people start to spend less time at home once the COVID-19 crisis subsides.
“Netflix subscriber trends have benefited meaningfully as a result of the current environment. As government restrictions ease, we expect some degree of trend reversal to emerge as the conditions that drove the surge in demand begin to subside,” Devitt said. “There is limited visibility to (second half of the year) numbers given the unknown timing of a potential return to normalcy and the degree that recent subscriber growth has been pulled forward.”
Loup Investors analyst Gene Munster echoed a similar point. Munster championed Netflix’s subscriber additions, which brought the company to nearly 183 million global subscribers overall, and added the company had “cemented itself as a central piece of consumers’ content diet” during the coronavirus lockdowns. But moving forward the company won’t benefit from the same stay-at-home boost that it received last quarter, at least to the same extent, Munster said.
“For Netflix’s valuation to grow beyond its current $190 billion, the company needs to tap into a new long-term trend,” Munster said. “Unfortunately, the truth is people want to spend less time at home, which is a headwind for retention and price increases.”
He added: “Summarizing the quarter in one word: temporary.”
Analysts aren’t expecting Netflix to pull more record results during Q2. And the company even warned against it in its letter to shareholders on Tuesday, with Netflix projecting it’ll add 7.5 million new subscribers during Q2, although it admitted that’s “mostly guesswork” because of the global economic uncertainty brought on by the pandemic.
Netflix’s strong Q1 was due in part to the release of several hit shows, including the docuseries “Tiger King,” which crossed over and became a pop culture phenomenon. On Tuesday, Netflix revealed the show pulled in 64 million viewers during its first month. Repeating that kind of impact typically isn’t factored into analyst projections, though, and coupled with the relaxing of stay-at-home orders, some analysts expect Netflix to lose its iron grip on our attention in the months ahead.
One analyst who broke with this view was Bank of America’s Nat Schindler, who on Wednesday raised his price target to $525 for Netflix.
“We think many of the behavioral changes positively impacting Netflix uptake (closed movie theatres, social distancing) will remain in place beyond shelter-in-place orders expiring and until a meaningful virus treatment is established,” Schindler wrote in a note to clients. “We see Netflix well positioned to sustain subscriber growth strength with [2020’s] content slate in-hand, budget to buy other studios‘ stranded content, and reduced [near-term] competition.”
Another factor behind Wednesday’s dip could simply be that Netflix was already on a big run heading into earnings, with its share price touching new all-time highs of about $440 per share. And since the start of the year, the company’s share price is up nearly 30%. Investors could just be looking to take a little profit off the table, especially without another “catalyst” like earnings on the horizon.
Investors could also be concerned about the pandemic’s effect on Netflix’s production and content release schedule, but Netflix CEO Reed Hastings and Chief Content Officer Ted Sarandos didn’t seem too worried about it on Tuesday. Sarandos, during the company’s earnings call, said it shouldn’t run out of new content anytime soon, pointing to the upcoming season of “The Crown” and its new animated film “Over the Moon” as two examples of tentpole content that is still on target for release later in 2020.
“We work really far out relative to the industry because we launch our shows all episodes at once. We’re working far out all over the world, so our 2020 slate of series and films are largely shot and are in post-production remotely,” Sarandos said. “We’re actually pretty deep into our 2021 slate. So we don’t anticipate moving things around.”