Netflix Shares Fall on Weak Subscriber Growth: What Wall Street's Saying

Shares of Netflix (NFLX - Get Report) were lower on Tuesday, the day after the streaming company reported lighter-than-expected net subscriber additions for the 2017 first quarter and downbeat guidance for second quarter earnings. 

On Tuesday afternoon, shares were down 3.3% to $142.37.

After Monday's close, Netflix reported first quarter earnings of 40 cents per share on revenue of $2.64 billion, vs. analysts' expectations of earnings of 37 cents per share, on revenue of $2.64 billion. For the second quarter, Netflix forecast earnings of 15 cents per share, considerably lower than consensus expectations for 24 cents per share. 

In addition, the company reported it had added 4.95 million new subscribers, lower than its own expectations for 5.2 million subscriber additions and consensus expectations of 5.3 million net added subscribers. However, Netflix did provide upbeat guidance for second quarter subscriber additions at 3.2 million, well above the 2.54 million subscribers analysts were expecting. 

Netflix explained that subscriber additions came in below expectations in the first quarter because the timing of new original content. Notably, Netflix moved the release of season 5 of "House of Cards" to the second quarter, instead of the usual first quarter release. New seasons of popular shows have traditionally helped Netflix add more subscribers than new licensed content, Cantor Fitzgerald pointed out in a note on Tuesday morning. 

The positive outlook for second quarter subscriber additions was enough to warrant at least three price target increases on Wall Street on Tuesday morning. Keep reading to find out what analysts are saying about the company's latest financial report. 

Jefferies, John Janedis (Hold, price target raised to $141 from $135) 

"Though net sub adds in 1Q were ~250K lighter than expected (+4.95M vs. guide of +5.2M), the focus is on the strong outlook for 2Q, which will benefit from new / returning originals (i.e. 13 Reasons Why, HOC, OITNB). All in, our 1H17 net add ests are largely unchanged (8.35M vs. prior +8.18M). Net adds QTD suggest the outlook for 2Q could be conservative, though it's also possible net adds were pulled forward." 

Canaccord, Michael Graham (Buy, price target raised to $165 from $160) 

"Netflix reported solid Q1 results, with revenue in line with consensus as higher ASPs offset slightly light paid subscriber adds. Key show releases being pushed into Q2 is the likely cause of the subscriber miss, as new seasons of top shows historically have had larger impacts on net adds than new shows. With the valuation becoming fuller (NFLX is up ~19% vs. S&P up ~5% YTD), the trend in rising long-term profitability is important given the upfront cash spend on content. We realize it will likely take a substantial sub beat to move the stock in the short-term, but the release slate in Q2 and Netflix's success with originals give us reason enough to remain buyers of the stock."

Cantor Fitzgerald (Overweight, price target raised to $165 from $160) 

"We're maintaining our Overweight rating on Netflix and raising our PT to $165 from $160, reflecting a stronger-than-expected 2Q subscriber outlook (+750K), partially offset by a slight miss in 1Q net adds (-230K) and virtually in-line financial results. Although quarterly net adds can be quite volatile, record 4Q net adds and the strong 2Q guide show healthy subscriber trends over longer periods, and a heavy slate of recurring originals should sustain growth for the rest of the year. We maintain our positive stance on the stock given 1) substantial long-term growth potential, particularly in international markets; 2) a strong secular tailwind as linear TV shifts to internet TV viewing; 3) the company's leadership position with $6B+ of P&L content spend; and 4) the recent inflection/path to gradually higher operating/EBITDA margins."

Wedbush Securities, Michael Pachter (Underperform, price target raised to $73 from $68)

"We continue to believe that Netflix cash burn is the driver of valuation, although largely overlooked by investors. While we have been consistently wrong about this stock, we have consistently valued stocks under coverage based upon the discounted present value of their future cash flows. As the cost of content continues to be bid up, we expect Netflix to continue to burn cash to fund content acquisition, and the company acknowledged that this will persist for "many years". . . We don't expect Netflix to become meaningfully profitable on a cash basis for several years, and we don't expect positive free cash flow for the remainder of this decade; even then, we think that positive free cash flow will remain elusive UNLESS the company decides to materially increase price and sacrifice growth. . . We think that Netflix is destined to be a cash burning high growth company until it changes its strategy and accepts its fate as a highly profitable slow growth company." 

JPMorgan, Doug Anmuth (Overweight, price target raised to $178 from $175)

"Content timing can shift subs quarter by quarter, but the underlying secular trend toward Internet TV remains very strong. NFLX's 1Q net adds came in a bit below guidance & investor expectations in both US & Int'l, partly a function of lighter content releases in 1Q. However, the stronger than expected 2Q guidance (w/nearly 40% of the 2Q net adds in place by this weekend) leaves 1H17 global net adds essentially unchanged or ahead at just over 8M, as shown in Figure 4. House of Cards & Orange Is The New Black seasons 5, 13 Reasons Why (released March 31), & Iron Fist (March 17), along with more original films including War Machine (May 26, starring Brad Pitt) should drive 2Q net adds during a seasonally slower quarter. . . NFLX's FCF will remain negative for the next few years as the company continues to aggressively invest in original content."

Goldman Sachs, Heath Terry (Buy, $170 price target)

"With ~20% growth in content spend (est.) this year, a growing distribution ecosystem and expanding addressable base, we believe that Netflix remains on track in building out an unmatched global entertainment platform. Therefore, we remain Buy rated."