'Shares look cheap': Here's what 4 Wall Street banks expect from Netflix's 4th-quarter earnings report

NetflixAnya Taylor-Joy stars in ‘The Queen’s Gambit’ on Netflix.
  • Netflix is set to report fourth-quarter earnings after the market closes on Tuesday.
  • Analysts view growing competition and recent price hikes as key hurdles for the streaming giant.
  • Detailed below is what four analysts expect when the company reports earnings and how they expect the stock to move.
  • Watch Netflix trade live here.

Netflix is scheduled to report fourth-quarter earnings after the market closes on Tuesday, and analysts expect the company to have extended its lead over a growing slate of competitors.

The last three months of 2020 saw Netflix roll out several hit series just as COVID-19 cases surged to dire levels. New shows including “The Queen’s Gambit” and “Bridgerton” joined the latest seasons of “The Crown” and “Cobra Kai.” Netflix also lifted prices in the US, Japan, and the UK.

Climbing coronavirus cases and economic restrictions likely bolstered growth through the quarter, but competition from Disney, NBC, and HBO intensified. Disney Plus expanded into Latin America and WarnerMedia inked a deal with HBO to debut its upcoming theatrical releases on HBO Max. Investors will likely look to Netflix for reassurance that it can keep its early-mover lead in the rapidly expanding sector.

Netflix closed at $US497.98 on Friday, down roughly 4% year-to-date.

Here’s what four Wall Street analysts expect from the company’s earnings report, from subscriber-growth targets to 2021 content quality.

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Bank of America: ‘In a strong position’

The team led by Nat Schindler expects the company’s revenue and earnings over the period to land just above estimates despite as-expected subscriber growth. New subscriptions in Latin America are likely to only reach half of what Wall Street anticipates, the bank said, citing Disney Plus’s expansion as a key pressure on Netflix.

That shortfall will be somewhat offset by stronger-than-expected growth in the Asia-Pacific region, the analysts added. Bank of America forecasts Netflix added 6.1 million paid users through the fourth quarter, in-line with the consensus estimate and slightly above the company’s previous guidance.

What might buoy subscriber growth in the fourth quarter is likely to pressure expansion in the new year, according to the bank. Commentary from Netflix management suggests the pull-forward effect will impact subscriber additions through the first half of 2021 before growth normalizes later in the year. While some of the impact is already expected, below-consensus guidance for first-quarter additions could cut into bullishness, the analysts said.

Still, the near-term uncertainty around subscriber growth doesn’t shift the bank’s long-term outlook. Bank of America sees Netflix gaining “significant leverage” on its investment in global content. Price increases around the globe also indicate the company “is in a strong position” despite new competition.

Bank of America holds a “buy” rating on the streaming company with a price target of $US670.

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Morgan Stanley: ‘Shares look cheap’

Analysts led by Benjamin Swinburne expect earnings, revenue, and subscriber growth to largely land in-line with estimates, but the lack of a positive surprise doesn’t dampen the team’s bullish outlook. Morgan Stanley finds Netflix’s path for positive cash flow “increasingly clear” as higher prices and penetration into growing markets boost sales.

Margins should also expand as the company scales up and more efficiently produces original content, the team added.

Apart from the relatively soft fourth-quarter forecast, Morgan Stanley expects Netflix to climb over the next year as the stock returns to higher valuation measures. The streaming giant’s shares “have actually de-rated from pre-COVID levels” despite the pandemic fuelling a sharp uptick in subscriber growth, the bank’s analysts said.

The company now trades at a similar price-to-earnings ratio as Disney despite its lead in the streaming industry. Shares currently “look cheap” and stand to rally 30% as the company closes in on steady positive cash flow, the team said.

Morgan Stanley rates Netflix “overweight” with a price target of $US650.

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JPMorgan: ‘Do not expect these price increases’ to slow growth

Analysts Doug Anmuth and Cory Carpenter expect Netflix’s subscriber growth to land closer to its previous guidance, with net additions landing just above 6 million through the quarter. Revenue and earnings are projected to fall slightly below the consensus forecast, but JPMorgan maintains investors should stick with the company.

For one, the analysts “do not expect these price increases” to pressure subscriber additions. Netflix’s lowest-priced plan is unchanged in key markets, and events like “Streamfest” in India can help maintain momentum, the team said. Renewed lockdowns, colder weather, and the company’s breadth of content should also help offset the impact of higher prices, they added.

Despite the optimistic outlook, JPMorgan expects sentiment toward Netflix to skew “muted” in 2021. The boost to subscriber growth seen at the start of the pandemic will make for tougher comparables in the new year, and the pandemic stands to have a lasting impact on production efforts and the company’s content lineup. Stronger-than-expected expansion by Disney Plus or HBO Max could also drag on shares, the analysts said.

The analysts hold an “overweight” rating on Netflix shares with a price target of $US628.

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Wedbush: ”Heroic” content delivery isn’t enough

Analyst Michael Pachter differed from JPMorgan’s outlook, citing Netflix’s price increases for its below-consensus growth forecast. Wedbush sees Netflix adding 4.7 million subscribers to close out the year, well below the expectation for 6 million new users. Earnings will land above Wall Street estimates while revenue comes in just below the consensus, he added.

Where the company stumbled on adding new subscribers, it maintained content quality and made inroads in key markets. Reviving cancelled franchises, cross-promoting genres, and expanding its international offerings helped Netflix keep members from jumping ship for other services, the analyst said.

“The company has been heroic in finding innovative ways to deliver new content to customers,” Pachter said. “Netflix’s experience in adapting foreign content to new markets has resulted in the company maintaining its content quantity lead over its competitors.”

Still, the quality lead isn’t enough to stave off balance-sheet pressures. Wedbush expects increased spending on content to drive negative free cash flow in 2021 before Netflix breaks even the following year. Despite being on a long-term path for sustainable positive cash flow, Netflix shares are “still overvalued,” Pachter said.

Wedbush rates Netflix shares “underperform” with a price target of $US235.

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