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Credit Suisse: Don't expect Netflix's Q1 earnings to 'spark joy,' but buy the stock anyway

Key Points
  • Analyst Douglas Mitchelson says subscriber growth — the key driver for Netflix shares — is expected to slow dramatically.
  • Mitchelson says global downloads generally correlate with Netflix's subscriber growth. He notes that global downloads expanded by 35 percent in the first quarter from a year earlier but were down from 48 percent in the fourth quarter.
  • Netflix's guidance for net additions on a quarter-over-quarter basis was flat, which is well below a seven-year average of 1 million.
  • Long term, he says, the stock is a good buy for investors as the streaming giant builds on its original content.
CNBC | Jeniece Pettitt

Netflix's upcoming earnings report may not send the stock rallying, but the stock is still a good buy in the long run, according to Credit Suisse.

Analyst Douglas Mitchelson, who has an outperform rating and a $440 a share price target, said subscriber growth will continue to be the primary driver for the stock. However, subscriber growth is expected to slow dramatically.

Mitchelson said global downloads generally correlate with Netflix's subscriber growth. He noted that global downloads expanded by 35 percent in the first quarter from a year earlier but were down from 48 percent in the fourth quarter.

Netflix's guidance for net additions on a quarter-over-quarter basis was also flat, which is well below a seven-year average of 1 million. "Netflix has guided 1Q19 net adds to be the 2nd smallest sequential improvement in its history," Mitchelson said in a note titled, "Will 1Q19 Results Spark Joy?" — a nod to the show "Tidying up with Marie Kondo".

"We believe the reason, more so than Netflix's estimated influence of price increases, … likely reflects a 'demand pull forward' scenario, where an abnormally strong 4Q18 pulled forward demand from the next quarter," Mitchelson wrote.

"We believe this has happened before; after a very strong 4Q16 net add performance Netflix actually missed its 1Q17 guidance," he added.

Netflix added 8.8 million subscribers in the fourth quarter of 2018, slightly more than expected. But worries over the company's ability to expand its subscription base have increased recently as more companies like NBC and Disney jump into the streaming space.

Long term, he said, the stock should be a good buy for investors as the streaming giant builds on its original content with shows including "The Umbrella Academy," "Stranger Things" and "Tidying Up."

He also said recent price hikes should boost revenue-growth acceleration. Netflix announced in January price hikes ranging 13 to 18 percent for its streaming plans.

Netflix is scheduled to report first-quarter earnings on April 16. The stock has surged more than 37 percent this year through Tuesday's close.

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