Netflix (NFLX) reported quarterly
user growth that exceeded Wall Street expectations. The news underscores a
recovery for the online streamer following
a rare miss in new user additions last quarter.
The Los Gatos, California-based
company brought on 6.96 million total new streamers, beating
its own guidance of 5 million total member additions for the quarter. Wall
Street had anticipated net additions of 5.069 million for the quarter. The company
issued guidance that it would add 9.4 million new members in the fourth quarter
Netflix reported earnings of 89
cents per share on revenue of $4 billion, in line with average analysts’
revenue estimates while handedly beating earnings expectations of 68 cents per
share. Streaming revenue grew 36% year-over-year, while global users breached
130 million paid and 137 million total members.
Netflix’s stock rose 6.39% to
$368.52 per share as of 10:12 a.m. Wednesday. Shares of peer internet stocks
and Amazon (AMZN) each posted gains shortly after market
open following Netflix’s earnings beat.
The streaming giant’s free cash flow
in the third quarter was negative $859 million versus negative $465 million in
the year-ago quarter, which the company emphasized in its shareholder letter
was due to a “growing mix of self-produced content, which requires us to fund
content during the production phase prior to its release on Netflix.” This has
created a gap between positive net income and free cash flow net deficit, the
Netflix expects its free cash flow to
be closer to negative $3 billion than to negative $4 billion for the full year
of 2018. The company’s year-to-date free cash flow is negative $1.7 billion.
Netflix underwhelmed last quarter
after the company reported in July it had attracted one million fewer
subscribers than expected, with net membership additions coming in at 5.15
million versus 5.2 million from the year-ago quarter. The stock had been up
106% year-to-date prior to its second-quarter earnings release. Shares of
Netflix are down about 15% over the past three months, and the stock sank
along with the broader market selloff last week.
Netflix remains a juggernaut for
online streaming, and the platform accounts for 15% of all internet traffic
globally, according to a recent report from Sandvine. This
comes amidst increasing competition from streamers including Hulu and Amazon,
which also produce original content. New online video services from WarnerMedia, Viacom, WalMart, Costco, Quibi and Apple have also been reported.
But company executives shrugged off
concerns of competition in a recorded
interview following Netflix’s third-quarter results.
“Someday there will have to be
competition for wallet share – we’re not naïve about that – but it seems very
far off from everything we’ve seen,” Netflix CEO Reed Hastings said.
Netflix Chief Content Officer Ted
Sarandos added that studios and partners “want their content to be seen, and
the best chance of doing that is doing it with Netflix. You see in the long
list of content brands and newly minted stars out of Netflix just this quarter,
you can see what we’re talking about putting content into the culture and into
In its shareholder letter, the
company included a chart of celebrities’ Instagram followers before and after
Netflix show launches, highlighting the platform’s pop culture clout.
But not all analysts have been so
optimistic on the stock following its disappointing results in July. Several
major firms – and historic Netflix bulls – slashed their price targets for the
stock ahead of earnings, citing global trends including a strong dollar and
rising interest rates. Goldman Sachs’s Heath Terry said in a note on Monday he was lowering the 12-month
price target to $430 from $470 “to reflect the contraction in broader internet
multiples.” Longstanding Netflix bear Michael Pachter of WedBush
Securities offered a 12-month price target of $125 for the stock ahead of
earnings in light of the company’s cash burn from content spend.
“We believe that Netflix’s valuation
is unwarranted. We expect the company to continue to increase its marketing and
content spending over the next several years in order to maintain the pace of
its subscriber growth,” Pachter wrote in a note ahead of earnings. “Should
quarterly cash burn continue to deteriorate throughout 2018 and 2019 (as it has
for the last five years), we are prepared to stay the course and to maintain
our UNDERPERFORM rating.”
Netflix’s earnings beat led Morgan
Stanley to reverse its price target for Netflix to $475 per share
from $450 per share on Wednesday. Just a day earlier, Morgan Stanley had
cut the price target for the first time in three months, to $450 a share from