Netflix hit with wave of downgrades, price cuts as Street reacts to disappointing subscriber outlook

Published Fri, Jan 21 20226:22 AM ESTUpdated Fri, Jan 21 20221:26 PM EST

Jesse Pound @/in/jesse-pound @jesserpound

The surprisingly low subscriber guidance from Netflix caused many Wall Street analysts to slash their estimates and downgrade the stock. Netflix reported its fourth-quarter results after the bell Thursday, and it beat estimates for profit and was in line with expectations on revenue. The company's global paid net subscriber additions came in at 8.28 million, close to the guidance of 8.5 million and above some analyst estimates. However, Netflix said it expected to see 2.5 million subscribers during the first quarter, well below the 6.93 million forecast by analysts surveyed by StreetAccount. The company also warned that foreign exchange impact would hurt margins this year. The report caused the stock to slide 20% in extended trading and led to a wave of downgrades and price target cuts from Wall Street analysts. Morgan Stanley analyst Benjamin Swinburne downgraded Netflix to equal weight from overweight and slashed his price target to $450 per share from $700. The guidance signals that Netflix pushing toward 300 million subscribers in the years ahead will be tough and expensive, Swinburne said in a note to clients. "The 1Q22 guidance implies this ramp in content is not translating into the 20-25 [million] net adds we have underwritten historically. Engagement is growing, churn is declining, and Netflix clearly has pricing power as evidenced by its recent 10%+ US price increase. However, bringing that incremental new member to the service is proving more challenging than we anticipated," the Morgan Stanley note said. Evercore ISI analyst Mark Mahaney downgraded the stock to in-line from outperform, saying the report raised long-term questions about Netflix's growth. "We still see NFLX generating close to premium revenue growth rates of 20% (ex-FX), but the contribution from unit growth (Sub Adds) is now less than half, which reduces the quality/sustainability of that growth," Mahaney said in a note to clients. Part of the debate around Netflix in recent years is how much of its growth was pulled forward by the coronavirus pandemic , with consumers signing up for streaming services with other entertainment options temporarily shuttered. Barclays analyst Kannan Venkateshwar, who downgraded the stock to equal weight from overweight, said in a note to clients that the guidance was "worse than worst case expectations." "Based on historical Q1 contribution to full-year growth, the company's guidance in essence implies net adds in '22 coming in even lower than '21, which was impacted by Covid comps," the Barclays note said. To be sure, not every analyst bailed on Netflix. JPMorgan's Doug Anmuth cut his price target on the stock to $605 per share from $725, but he maintained an outperform rating on the stock and said investors should consider buying the stock after this sharp decline. "The biggest question coming out of NFLX earnings is whether the outlook is thesis changing. It may be on a near-term basis — NFLX will be in the penalty box. But we don't believe it's thesis-changing long-term or that there's a structural shift to the NFLX story," Anmuth said in a note to clients. Here's a look at some of the other downgrades: Baird to neutral from outperform Macquarie to underperform from neutral Credit Suisse to neutral from outperform KeyBanc to sector weight from overweight — CNBC's Michael Bloom contributed to this report. Correction: Netflix beat estimates for profit and was in line with expectations on revenue. An earlier version misstated the results.

The Netflix logo is shown in this illustration photograph in Encinitas, California.

Mike Blake | Reuters

The surprisingly low subscriber guidance from Netflix caused many Wall Street analysts to slash their estimates and downgrade the stock.