Netflix, Inc. (NFLX) Pays a High Price for Subscriber Beat

Netflix, Inc. (Nasdaq: NFLX) bounced back from a subscriber miss in the second quarter and smashed growth expectations in the third quarter on Tuesday afternoon. NFLX stock soared on Wednesday morning, but some analysts on Wall Street are questioning Netflix’s aggressive spending.

Netflix reported third-quarter earnings per share of 89 cents, beating analyst expectations of 68 cents. Revenue was $4 billion, in line with consensus estimates and up 34 percent from a year ago.

However, the news that sent NFLX stock up nearly double-digits was Netflix’s 6.96 million subscribers added in the third quarter, well ahead of Wall Street expectations of around 5 million. Of those new subscribers, 5.87 million of them came from international markets. Netflix now has 130 million paid subscribers.

Operating margins were up 5 percent in the third quarter to 12 percent.

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Looking ahead, Netflix guided for net subscriber additions of 9.4 million in the fourth quarter, well above consensus estimates of 7.64 million. The only potential troubling trend in an otherwise stellar quarter is the company’s expectation that operating margin will drop to just 5 percent next quarter.

Following the subscriber beat, analysts at Morgan Stanley, J.P. Morgan, Raymond James, Canaccord Genuity, Bank of America and other firms raised their price targets for NFLX stock.

Bank of America analyst Nat Schindler says the second quarter subscriber miss is now a distant memory.

“Given solid net adds growth trends in 3Q and strong 4Q guidance, NFLX has alleviated investor concerns around its growth trajectory,” Schindler says. “Despite great success growing subscribers, we see continued growth internationally and additional leverage with pricing increases over the next five to 10 years.”

But amid all the bullishness on Wall Street, KeyBanc analyst Andy Hargreaves downgraded NFLX stock on Tuesday and questions the cost of Netflix’s growth.

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“While we maintain a favorable view of Netflix’s strategic positioning, we believe improving investment efficiency or significant ancillary opportunities are needed to drive upside from current levels, and we do not anticipate either over the next year,” Hargreaves says. “Margin expansion and investment efficiency are not exceeding our expectations.”

KeyBanc has downgraded Netflix from “overweight” to “sector weight” and has a $377 fair value estimate for the stock. Bank of America has a “buy” rating and $440 price target for NFLX stock.

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