The Ratings Game: ‘We see few catalysts.’ Netflix hit with Wall Street downgrades after disappointing subscriber forecast

The bleak view on subscribers triggered losses for rivals as well, with shares of Disney + and Hulu owner Walt Disney
DIS,
-1.66%,
down over 3% and streaming device maker Roku
ROKU,
+0.52%,
off 4%.

“Net, we see few catalysts,” said KeyBanc Capital Markets analysts Justin Patterson and Sergio Segura, who cut shares to underweight from overweight.

Despite an improved content slate, gross subscriber adds have not picked up after pandemic-fueled acceleration seen in the first half of 2020, said the KeyBanc analysts. With a seasonally softer second quarter to come, the burden will fall heavily on the second half to reach 20 million plus paid net adds, they added.

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KeyBanc sees declining operating income and earnings-per-share growth through the third quarter of 2022, and a changing growth profile of the company will now shift the focus from an enterprise value-to-sales focus to price/earnings. That “makes risk/reward less compelling, given depressed earnings growth on a two year CAGR [compound annual growth rate] formula,” said Patterson and Segura.

Netflix executives blamed the “ongoing COVID overhang and macroeconomic hardship in several parts of the world,” for the forecast. That’s as the company hiked prices in October 2020 for the U.S. and Canada, and confirmed last week another increase is coming for that region.

Sales grew to $7.71 billion in the holiday quarter, from $6.6 billion in the same period a year ago. Earnings of $1.33 a share rose from $1.19 a share a year ago, beating the 83 cents expected by analysts polled by FactSet. Sales matched expectations.

Elsewhere on Wall Street, Barclays analysts dropped Netflix to equal weight from overweight, and slashed their price target by 37% to $425 from $675 a share.

“While Netflix performance in Q4 was roughly in line with guidance, the company’s outlook in many ways played almost perfectly into the bear thesis on the stock going into the quarter,” said Barclays analysts Kannan Venkateshwar, David Joyce and Ross Sandler.

In addition to a weak outlook for subscriber numbers, the company is expecting no margin growth in 2022, “While some slowdown in margin growth was expected in ’22 because of the outperformance over the last couple of years, the degree of slowdown guided to is much worse than expected,” he said.

“Overall therefore, based on company guidance, 2022 is effectively shaping up to be the company’s slowest year of growth on most KPIs [key performance indicators],” said the Barclays team.

Evercore analysts cut their rating to in line from outperform, dropping their price target to $525 from $710.

“There are a slew of explanations – heightened near-term churn due to the U.S. price increase (plausible), macro challenges in Latam (plausible), rising competition (possible but hard to specifically point to), a very late Q1 content slate release
with Bridgerton (arguable), Omicron uncertainty (why not), market maturity (possible), and changed seasonality with the elimination of free trials in most regions (possible),” said a team of analysts led by Mark Mahaney.

“But the negative inflection implied by the Q1 guidance is very significant,” they said.

Going against the grain was Benchmark’s Matthew Harrigan, who has had a bearish position on Netflix for the past two years, and lifted his rating to hold from sell.

“Netflix stock should find a floor as the $405 after market price discounts both member growth deceleration and margin underachievement,” Harrigan wrote in a note to clients. He “vacated” his previous $470 stock price target, but said he sees fair value for the stock at $450.