Netflix (NFLX) shares have soared to new heights recently, in tandem with the alarming rise of COVID-19 cases. Therefore, accepted wisdom dictates, with the possibility of another extended period glued to the sofa browsing Netflix’s content library, the streaming giant is set to benefit until the coronavirus is stamped out for good.
But not so fast, says one member of a relatively marginalized group. Among Wall Street analysts, Wedbush’s Michael Pachter is the biggest of Netflix bears.
Ahead of Netflix’s second-quarter earnings this evening, Pachter reiterates an Underperform (i.e. Sell) rating along with a $220 price target. The figure implies shares will drop by a massive 58% in the year ahead. (To watch Pachter’s track record, click here)
Pachter explained his reasoning, “Notwithstanding a boost from shelter-in-place, we expect content spending to trigger substantial cash burn for many years. Competition for both content and subscribers may slow growth and limit the potential for price increases, and consistently negative FCF makes DCF valuation speculative.”
Pachter expects Netflix to report 2Q20 revenue of $6.118 billion and EPS of $1.82. Considering his bearish tendencies, this is surprising, as it is slightly above consensus estimates for revenue of $6.079 billion and EPS of $1.81.
A recent survey conducted by Wedbush also leads Pachter to believe Netflix is retaining many of its subscribers, with the data also suggesting that for 50% of those surveyed, Netflix is their most used streaming service. Pachter also expects Netflix to follow up Q1’s record breaking new subscriber additions - Netflix added 15.8 million global accounts in the first quarter – in its latest report. However, Pachter is not convinced the numbers add up, as a “DCF (discounted cash flow) analysis results in an enterprise value of $108.5 billion, or roughly $220 per share,” - coincidentally Pachter’s revised target.
Driving the bulk of Pachter’s negative assessment, is the cost involved with satisfying consumers’ need for new thrills.
Pachter said, “The SIP (shelter in place) gains may be sustainable, but they increase the urgency to create content. We think the likely giant spike in new subscribers increases pressure on Netflix for retention. More consumption of content suggests even greater need to replace content with something new, and we expect spending and negative free cash flow to return to 2019 levels in 2021.”
Some of Pachter’s colleagues also think Netflix’ run up must come to an end, although sentiment remains positive. NFLX's Moderate Buy consensus rating is based on 22 Buy ratings, 10 Holds and 3 Sells. However, over the next 12 months the analysts expect the share price to decline by 4%, as the $500.48 average price target implies. (See Netflix stock analysis on TipRanks)
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