Netflix (NFLX) shares have been on the backfoot recently; since mid-November, the stock has pulled back ~22%.
The drop comes alongside several concerning factors, as noted by Stifel’s 5-star analyst Scott Devitt. The analyst counts: “(1) weakening app engagement beginning in November; (2) the prospect of slower subscriber growth; and (3) less profitable growth in international markets,” which have likely “tempered expectations” and placed negative pressure on shares.
Nevertheless, with the release of high-profile original content and the progress made on its video games and visual effects initiatives, the analyst believes the company “executed well on its strategy in Q4.”
However, that can’t gloss over Apptopia engagement data which suggests a more “modest subscriber addition cadence” in Q4 than Devitt had previously expected.
As of December 31st, MAUs (monthly active users) were tracking at ~217.6 million, roughly 6.3 million above the figures at the end of Q3, but ~2.2 million below management’s guidance for 8.5 million net adds in the quarter.
This foreshadows less potential upside in Q4’s results, and as such, Devitt reduced his Q4 sub add estimate from 10.1 million to a “consensus-matching” 8.6 million, which is also about the same as management’s 8.5 million guidance.
There are other factors to note regarding the weakened sentiment, including the macro related trend of sector rotation away from tech/growth and investors showing more interest in streaming competitors and the “utility of alternatives.”
Generally speaking, Devitt thinks that in contrast to the recent focus on sub add growth and Netflix’ leadership status, the NFLX narrative is changing and includes other elements. These number: “(1) steady growth in lower ARPPU international markets coupled with broad utilization of pricing power as an offset; (2) content-spend leverage as Originals become dominant in the content mix; (3) steady flip to free cash flow generation; and (4) engagement-enhancing product verticals which support pricing power.”
Management’s ability to make good on these “developing pieces” of the story, says the 5-star analyst, will partially determine further share price appreciation.
So, bottom line, what does it all mean for investors? Devitt reiterated a Buy rating on Netflix shares, although his price target gets a trim; the figure drops from $690 to $660, suggesting shares have room for 22% growth over the coming months. (To watch Devitt’s track record, click here)
Turning now to other analysts’ coverage which shows that Netflix retains most – though not all – of the Street’s support; based on 23 Buys, vs. 4 Holds and 3 Sells, the stock carries a Moderate Buy consensus rating. The average target is just above Devitt’s; at $675.54, the figure suggests one-year returns of ~25%. (See Netflix stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
