A new band of Wall Street analysts rushed to cut price targets and ratings on Netflix in response to deeply disappointing results, though shares of the pioneering streaming service have been under pressure for months.
Shares of Netflix NFLX, +3.18% tumbled around 29% in premarket trading on Wednesday, the morning after the company delivered a considerable slowdown in revenue growth and a surprise net loss of subscribers. While Netflix shed 200,000 subscribers in the first quarter, the company predicted it could lose 2 million more in the second quarter.
Market Pulse: Netflix bonds hit after earnings report shows subscriber losses
Though a wave of analysts downgraded Netflix shares after a downbeat report three months back, more piled on after Tuesday’s earnings. UBS analysts warned that increased competition, macroeconomic pressures, and a saturated market could further impact Netflix’s ability to boost its subscriber count. They cut their rating on the shares to neutral from buy, and lowered their price target to $355 from $575 a share.
Pivotal Research analysts slapped a double downgrade on Netflix, cutting their rating on the shares to sell and taking a mixed view on some of the company’s recently discussed efforts meant to jolt momentum.
The analysts thought that Netflix could boost average revenue per user by cracking down on password sharing, though they warned that such a move could also cause “materially higher churn.” Additionally, the Pivotal team was unconvinced about the merits of a potential advertising tier on Netflix, writing that “it cheapens the brand and the product vs. the current great consumer experience and introduces ad volatility to results.”
The Pivotal analysts lowered their rating to sell from buy and slashed their price target by more than half, to $235 from $550.
Wells Fargo analysts said that Netflix shares look less attractive now that the company is “firmly on the defensive,” and they argued that the streaming giant’s narrative “is dunzo for now.”
As Netflix plans to increase its emphasis on programming, take aim at password sharing, and explore the introduction of advertising, the Wells Fargo team sees the company in a “reactionary” position. “Said investments change the historically simple story, cloud the return profile, and cause Netflix to lose its shine, in our view,” they wrote. “From here, we see the catalyst path as being as clear as mud.”
They reduced their rating on the shares to equal weight from overweight, while halving their target price to $300.
J.P. Morgan joined the downgrade parade as well, with its analysts writing that Netflix just had “a sea change quarter…in which the company essentially conceded to every key point of the bear thesis.”
They noted that Netflix’s work on password sharing and advertising ultimately could help revenue, though the payback would likely take time.
“[T]heir development is still early stage & we do not expect rollout until 2023 for account sharing & 2024 for advertising,” the J.P. Morgan analysts wrote. “Accordingly, near-term visibility is limited, our 2022 net adds come down sharply from 16 million to 8 million, & there’s not much to get excited about over the next few months beyond the new, much lower stock price.”
They lowered their rating to neutral from overweight while reducing their target price to $300 from $605.
Barry Ritholtz, chief investment officer of Ritholtz Wealth Management, seemed to take aim at the late wave of downgraders. He tweeted that Wall Street analysts appeared “utterly useless” this time, given that Netflix shares had dropped about 50% from their October highs even without taking into account the declines expected in Wednesday’s regular session.
Netflix’s take on the state of the streaming market weighed on rivals and others in the industry. Shares of Walt Disney Co DIS, +3.23% dropped 5% and Roku Inc. ROKU, +8.22% slid 6.8% in premarket trading, while shares of Warner Bros. Discovery Inc. WBD, +1.37% and Paramount Global PARA, +0.86% also fell.
Evercore analysts, led by Mark Mahaney, slashed their price target to $300 from $525 a share. “We continue to view NFLX as having exited Premium Growth Land and believe the stock will likely track the market from current levels,” they said in a note to clients, while reiterating the in-line rating they established in January.
“Netflix is a great company and a great service. And NFLX has been an amazing stock over the last decade+. But not too dissimilar to what happened to PCLN/BKNG BKNG, +1.82% [Priceline/Booking] five years ago, growth has started to slip, largely due to maturity and competition, but also to new market challenges,” said Mahaney and his team.
The pandemic, they said, drove Netflix to further maturity in its most established markets like North America, Latin America, and Western Europe. Netflix is now in about 60% of North American broadband households on paper, though the company’s penetration is likely greater when factoring in that Netflix sees considerable password sharing among people not in the same household, the analysts noted.
Wedbush analyst Dan Ives tweeted Wednesday that the current earnings season was looking like “have and have-nots” for the tech sector.
“Enterprise, cloud, and cybersecurity will shine in our opinion as enterprise spend remains strong on digital transformation, while WFH/Covid growth poster child stories Netflix, Zoom, etc. will fade,” he said.