Netflix on Tuesday posted quarterly earnings that crushed Wall Street’s expectations thanks to its best ever third-quarter subscriber growth.
The video-streaming giant earned $US0.89 per share , 30% above what Wall Street analysts had expected.
Meanwhile, it added 7 million new subscribers in the third quarter, well above the 5.3 million subscriber additions it reeled in at this time last year and the 5 million expected by analysts.
The tech giant said it will add 9.4 million subscribers in the fourth quarter, up from the 8.33 million it added in the holiday period last year.
Nearly every analyst was impressed by Netflix’s subscriber growth, especially in overseas markets. But they have mixed opinions on how Netflix’s spending on original content will impact its profitability.
Here’s what Wall Street is saying about the record quarter:
RBC Capital Markets
Price target: $US450 (from $US440)
“Long-term fundamental trends remain very, very, very much intact,” analyst Mark Mahaney said.
“We don’t believe in ‘open-ended growth stories.’ But, darn, Netflix is about as close to one as you can find in today’s market. Global Subs Adds are accelerating in 2018 – per our extensive survey work, the Netflix consumer value prop is compelling. Global Streaming Revenue is accelerating too — pricing power surely helps. And Corporate Operating Margins are expanding — the advantages of a scalable model.”
Mahaney said he views the steady expansion in Netflix’s US contribution margins as demonstrating the company’s profitability, with its fixed-cost content nature and historically declining churn rates suggesting further margin expansions.
“We also view Netflix as one of the best derivatives off the strong growth in online video viewing and in Internet- connected devices,” he said. “We believe that Netflix has achieved a level of sustainable scale, growth, and profitability that isn’t currently reflected in its stock price.”
Price target: $US450 (from $US415)
“Netflix shies away from talking about any one international market too specifically, but it called out growth in Asia, and we believe India is becoming a bigger factor,” analyst Doug Anmuth said.
Anmuth added he believes previous Netflix products in India have proved to have strong traction, including Sacred Games, Lust Stories, and Ghoul. Selection Day, the 3rd original series in India, will be released in fourth quarter, infusing new momentum to drive subs growth.
“We believe content is strong into 4Q and 2019, and NFLX could again deliver more net adds next year than this year particularly as India & Japan gain greater traction,” he said.
“The bigger picture path is consistent, and we continue to believe there is significant growth potential ahead, with Netflix on track to have 200 million global subs in 2020-2021.”
Price target: $US480
“Netflix 3Q results exceeded consensus expectations in both the US and International segments as the correlation between content spend and subscriber net adds strengthened for the sixth consecutive quarter,” said analyst Heath Terry.
“4Q guidance far exceeded consensus expectations, reflecting the strength of the content line-up through year-end, amplification from newer distribution partnerships and growth in the addressable audience, particularly in earlier stage mobile-first markets. “
He added: “As Netflix subscriber adds continue to exceed expectations and it approaches an inflection point in cash profitability following the current investment period in advance of the loss of Disney content late next year, we believe shares of Netflix will continue to significantly outperform.”
Price target: $US370
“Net adds were significantly ahead of our estimates and consensus, driven by strong global growth, including in Asia,” said analyst Mark Kelley.
“Management noted an increased focus on owned original first-run content, which has the potential to lower costs by avoiding third-party licensing markups. International original content is another point of emphasis, and the company plans to continue to invest heavily in building out local content libraries. On that front, Netflix does not anticipate any significant impact from local content quotas in the EU. Moving forward, the focus is now squarely on content spend and the break-even timeline.”
Price target: $US150 (from $US125)
“Notwithstanding the impressive results, we see clouds on the horizon,” said analyst Michael Pachter.
“We believe that Netflix’s valuation is unwarranted. We expect the company to continue to increase its marketing and content spending over the next several years in order to maintain the pace of its subscriber growth.”
He added: “Should quarterly cash burn stabilise in 2019, we are prepared to reconsider our UNDERPERFORM rating, particularly if we see signs next year that the company can increase its cash flow and make progress toward breakeven and ultimately toward positive cash generation.”
“We expect another trip to the debt markets due to continuing cash burn. Until we see progress, we are reiterating our UNDERPERFORM rating, but are increasing our 12-month price target per share to $US150 from $US125 previously, to reflect faster subscriber growth than we previously modelled and the possibility that free cash flow burn will stabilise.”
Business Insider Emails & Alerts
Site highlights each day to your inbox.
Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.