Netflix Inc. has a history of trading wildly around its earnings, and with first-quarter results ready to drop April 20, investors and analysts are champing at the bit.
The vast majority of sell-side analysts have "buy" ratings pinned on the ticker, according to S&P Global Market Intelligence, even though the company's shares surged about 67% for the full year 2020. Analysts say the company came out of the pandemic well positioned financially and primed for further growth.
Moreover, Netflix is in the midst of a planned pivot to a mature strategy grounded in shareholder returns and stable debt ratios. In January, Netflix revealed an unexpected cash-flow-positive year in 2020, and executives said the company will no longer need debt financing to sustain its operations and substantial original content appetite. They even teased the potential for share buybacks, landing the Silicon Valley darling firmly amid the suits of Wall Street.
The results sent Netflix shares soaring Jan. 20, the first day of trading following Netflix's after-market earnings release Jan. 19.
But there was a downside to Netflix's strong performance in 2020 — namely, warnings from company executives that subscriber growth could be slowed in 2021, as the pandemic period created artificial acceleration in streaming adoption and pulled many signups forward.
Still, a number of analysts remain undaunted. While the company guided for paid net membership additions of 6 million for the first quarter, the Wall Street consensus stands between 6.2 million to 6.5 million, according to various sell-side notes reviewed by S&P Global Market Intelligence.
Truist Securities analyst Matthew Thornton is even more bullish than most, expecting membership additions to land at 7 million or more, based on search engine and app download data. However, for the second quarter, he believes analyst consensus estimates of 4.4 million paid net additions are too high. The pandemic pull-forward effect could restrict member adds below 4 million, and company guidance delivered during the first-quarter commentary could surprise higher expectations.
A decline in membership growth along with the pull-forward in expenses as the company resumes its production cycle could weigh on Netflix's newfound financial security, but most analysts believe the company can stay ahead of the curve.
"Despite the need to ramp up production spend to restore the content pipeline which was depleted during the lock downs, the materially higher cash balances and improving cash flows the company has generated through 2020 will be sufficient to meet the company's capital needs in 2021," Moody's Investors Service analyst Neil Begley said in an April 15 note upgrading the company's corporate debt rating.
The analyst went on to acknowledge that Netflix will likely see volatility in subscriber growth, delivering quarterly beats and misses as it has historically, and any natural volatility could be exacerbated by the slim content pipeline going into 2021. However, the Moody's analyst expects Netflix to rise above these challenges financially.
"We also believe that the medium and longer-term outlook remains very favorable for the company as it continues to build on its significant scale to penetrate global addressable homes of over 1.5 billion, sustaining competitively low cost per viewing hour leadership, growing average revenue for member, and reinvesting in even more content as it benefits from this virtuous cycle," Begley said.
Supporting the company's content outlook, Netflix recently managed to strike a first-run streaming deal with Sony Group Corp., a notable achievement at a time when most studios are pulling content from third-party platforms to support their own nascent streaming services. The migration of content away from Netflix's platform can be seen in the company's net noncurrent content assets figures, which include its licensing agreements with outside studios. The growth of that line item has been stalling rapidly, even as Netflix has catapulted its own content budget.
The Sony deal helped support an upbeat April 15 note from Wedbush Securities analyst Michael Pachter, who, until Netflix benefitted so greatly from the pandemic period, did not believe Netflix could get ahead of its production expenses and cash flow burn. Largely due to stalled productions during the pandemic, which typically consume the vast majority of Netflix's capital needs, Netflix ended 2020 with $1.9 billion in free cash flow, compared to a cash deficit of $3.3 billion in 2019.
"The company managed its production spending in a very difficult environment, and while conserving cash and generating $1.9 billion of positive free cash flow in 2020, Netflix still managed to add a record number of new subscribers. We expect a reversion to much higher content spending, but the company’s nearly 210 million paying subscribers are generating enough gross profit for Netflix ... to begin to deliver consistent positive free cash flow in 2022," Pachter said.
However, he stopped short of adding a "buy" rating to the pool. Instead, the Wedbush analyst reiterated his "underperform" rating on the ticker, citing valuation concerns.
Netflix closed April 16 at $546.54.