The core debate on Netflix stock is whether the streaming video giant can maintain its subscriber growth amid growing competition from new streaming services and from other forms of entertainment as the economy begins to emerge from the Covid-19 shutdown.
Investors will get some new clues on that question on Tuesday, when Netflix (ticker: NFLX) reports first-quarter financial results.
In reporting fourth-quarter results, Netflix projected March quarter revenue of $7.1 billion, with earnings of $2.97 a share, and 6 million net new subscribers. The net-add forecast for the March quarter is down from the 15.8 million spike in subscribers driven by Covid-19 in the year-ago first quarter.
The company expects operating margin in the March quarter to jump to 25%, from 16.6% a year ago and 14.4% in the fourth quarter.
Last quarter,Netflix surprised Wall Street with the news that it now expects to be cash flow break-even or better moving forward—and that it has begun considering stock buybacks. Netflix had $1.9 billion in positive free cash flow in 2020, thanks to lower production costs as a result of the pandemic, compared with a $3.3 billion cash flow loss in 2019. For 2021, Netflix expects to break even on a cash flow basis. Fourth-quarter cash flow was negative $138 million.
Netflix also said that with $8.2 billion in cash and an untouched $750 million credit facility, “we believe we no longer have a need to raise external financing for our day-to-day operations.” In addition, the streaming giant said it had about $16 billion in debt overall and expects to maintain $10 billion to $15 billion in gross debt over time. Netflix said it would “explore returning cash to shareholders through ongoing stock buybacks,” something it hasn’t done since 2011.
The stock shot higher on that news, but has since eased back, as attention turns to the potential for slowing near-term subscriber growth. Analyst sentiment heading into earnings is mixed.
Piper Sandler analyst Thomas Champion, who has an Overweight rating and $605 target price on Netflix, is bullish on the stock heading into the report. While noting that the company was a beneficiary of the pandemic, he thinks Netflix will benefit from a combination of “a strong consumer” as the economy reopens, a clamp-down on password sharing, and “a pandemic tailwind that may remain in Europe.” Champion notes that a recent Piper survey of teens found that they allocate 32% of video consumption to Netflix, versus 8% for Hulu, the second-most popular subscription video service.
UBS analyst John Hodulik notes that investors have become increasingly focused on how summer seasonality might manifest this year, given a reopening economy and the potential for added churn from higher subscription prices in some markets. The stock could remain volatile in the short-to-medium term, he warns. But the analyst “continues to view Netflix as the long-term winner within streaming media and remains constructive on the fundamentals.” He keeps a Buy rating and $650 target price on Netflix shares.
Raymond James analyst Andrew Marok, who has a Market Perform rating on Netflix shares, remains cautious on the stock for now. Marok continues to view Netflix as a “long-term winner in the video-on-demand space,” he writes. He does see some near-terms risks, however: the pace of subscriber additions post-pandemic, the impact of the pandemic on 2021 content releases, and scaling competition from cheaper competitive subscription services.
For Netflix’s June quarter, Wall Street consensus calls for revenue of $7.4 billion, earnings of $2.69 a share, and 4.4 million net subscriber additions.