On January 20, Netflix (NFLX) - Get Netflix, Inc. Report stock tumbled more than 20% after the company released its fourth-quarter earnings report. Although Netflix reported better-than-expected profit and revenue that was in line with Wall Street's expectations, the company's outlook for subscriber growth was disappointing.
Many experts have now cut their 12-month price targets for Netflix stock. But the long-term consensus is still bullish and predicts significant upside potential.
Fourth-Quarter Earnings Concerns
Overall, Netflix's fourth-quarter earnings weren't bad. On the contrary, the company matched revenue guidance and even topped consensus estimates with $7.71 billion. And the diluted earnings per share (EPS) of $1.33 were well above the consensus estimate of $1.13.
But the company reported it had added 8.3 million net subscribers. That was the second time net adds missed guidance since mid 2019.
Investors were also concerned about the company's gross margin of 32% and operating margin of 8.2%. Those were the lowest margins in at least 12 quarters.
However, the main driver of Netflix's post-earnings plummet was its poor outlook for the first quarter. Netflix estimates it will add 2.5 million new users. That would be the second-lowest quarter of growth in at least five years.
By itself, a quarter of underperforming subscriber growth wouldn't be problematic. However, this disappointing forecast came at a time when the company needs to prove it can continue to grow post-pandemic. That's leading many investors to question Netflix's business model.
What Wall Street Said After NFLX Earnings
The weak outlook for the first quarter seems to have taken Wall Street by surprise. However, despite several analysts cutting their NFLX price targets and downgrading the stock, the general consensus remains bullish. The median price target is $521, indicating more than 30% growth potential in 2022.
Starting on the bull side:
- Despite lowering his NFLX price target from $700 to $650, BMO Capital analyst Daniel Salmon remains bullish, predicting an upside of nearly 70%. The analyst believes Netflix management will engage in a buyback later this quarter. He also notes that Netflix has little regulatory risk, compared to other FAANG stocks.
- Another bull is Cowen analyst John Blackledge, who lowered his firm's price target on Netflix from $750 to $600. But he maintained his Outperform rating on NFLX, implying an upside of more than 50%. The analyst reported that foreign exchange headwinds had compressed margin expectations in Netflix's guidance.
- Still on the bull side, UBS analyst John Hodulik lowered his firm's price target on Netflix from $690 to $575. But that's still nearly a 50% upside. He also reiterated his "buy" recommendation on NFLX shares. The analyst acknowledges the soft first-quarter subscriber outlook and attributes it to macro pressure in Latin America. Hodulik remains bullish on the company's operating leverage due to Netflix management holding its outlook at 300bps of average annual margin expansion.
On the bear side:
- Evercore ISI Mark Mahaney changed his "buy" recommendation to "hold" following disappointing first-quarter guidance. He said that the poor outlook indicates the weakest first-quarter subscriber growth in the company's history. Still, his price target of $525 implies that Netflix shares have over 30% upside potential in the next 12 months.
- Macquarie analyst Tim Nollen was already skeptical about Netflix prior to the fourth-quarter earnings release. However, the analyst downgraded his neutral rating to sell and cut his price target to $395. This still indicates an upside of 2%.
- Meanwhile, Wedbush analyst Michael Pachter reiterated his price target of $342, as well as calling NFLX "overvalued."
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