Netflix Looking Strong For Long Haul, But May Face Short-Term Bump, Analysts Say
It wasn't quite the Tale of Two Analysts, but depending on whether you're taking the long view or the short one, Netflix has substantially different roads just ahead.
Long term, the path is only getting prettier, in part because of Netflix's global investment in high-quality feature-length films, an investment that contrasts sharply with its Hollywood competitors, which are still clinging to a theater-first distribution model even as the pandemic has shut down theaters and sent most big movies into next year or later.
That's just one of six reasons why LightShed Partners analyst Rich Greenfield suggests you should buy Netflix now, according to his blog post this morning.
In the post, Greenfield upped the Netflix target price to $630 a share, up more than two-thirds from his now “very stale” 2019 target of $375. That latter price was constructed last fall, just as the Apple TV+ and Disney+ services were about to launch, and WarnerMedia’s HBOMax and NBCUniversal’s Peacock were hovering menacingly on the horizon.
“Netflix not only shrugged off competition, the COVID-19 pandemic has pulled forward industry change, breaking the theatrical business just as Netflix’s theatrical investments are starting to bear fruit,” Greenfield wrote in a post this morning.
Greenfield suggested Netflix will benefit from its competitors’ unwillingness to truly pivot into streaming and away from their traditional film-release models built around a first window of theatrical exhibition.
This month, both WarnerMedia’s Tenet, which was released in theaters, and Disney’s Mulan, which was released on Disney+ for those who paid a $29.99 premium, appeared to be expensive failures. Each film cost an estimated $200 million to produce.
Greenfield contrasted those debacles with the Disney+ July release, for no extra cost, of the movie version of Broadway hit Hamilton in July. It drove big jumps in app downloads and signups at a time when the service was suffering from a lack of other new original content. The studios could have done the same with Tenet and Mulan, but didn’t, for differing reasons.
“Thanks to the financial failures of Tenet and Mulan, Hollywood studios are now delaying all of their most expensive feature films until at least summer/second half 2021,” Greenfield wrote. “At the same time, Hollywood studios are selling off small-to-mid-budget films to be released directly onto Netflix and other streaming services. So while Hollywood is effectively dormant, Netflix is releasing film after film at no additional cost to subscribers.”
Greenfield pointed to the lofty position occupied on Netflix’s top 10 lists by Enola Holmes, featuring The Witcher’s Henry Cavill as Sherlock Holmes and Stranger Things star Millie Bobbie Brown as his younger sister. Legendary produced the film for theatrical release originally, but sold it to Netflix, which has 18 more movies from around the world on its October schedule.
“As consumers begin to appreciate the steady stream of high-quality films on Netflix at no additional cost, it makes Hollywood’s (premium video-on-demand) ambitions even harder to achieve and it likely means that theatrical attendance will never rebound to prior levels whenever the pandemic is behind us,” Greenfield wrote. “The longer Hollywood studios remain focused on the sequential-release pattern for movies that starts with theatrical, the more it advantages Netflix.”
Greenfield's other reasons to invest in Netflix include “unprecedented industry scale,” pandemic-accelerated cord-cutting and industry transformation, competitors’ lack of global ambition (as in, providing content local to all those markets instead of just Hollywood-centric shows), and a Disney-scale investment in animation, which can drive family signups, stickiness, and engagement.
Meanwhile, another analyst report Tuesday warned that, for all the company's overall strength, this quarter still might have some ugly, if short-term impacts on subscriber numbers, thanks to controversy over a French film this past month.
Wells Fargo’s Steven Cahall cut his estimate for Q3 subscriber growth by half, to 2.5 million worldwide, because of anticipated North American cancellations and boycotts over the French film Cuties (originally Mignonnes), which has been criticized as exploiting and sexualizing underage girls.
Cuties follows an 11-year-old girl whose traditional Muslim African family moves to Paris, where she joins a school dance troupe there as she tries to fit in with a new culture.
The film’s writer/director, Maimouna Doucouré, has written that Cuties was designed to be a critique of the sexualization of young girls, but a Netflix promotional poster set off huge controversy even before the Sundance Festival award winner was released. The streamer later apologized for the “inappropriate” marketing material.
The 2.5 million net subscriber growth includes a loss of 2 million subscribers in the United States and Canada, instead of adding 500,000 subscribers in the streamer’s most mature market, Cahall wrote.
"If we are to believe reports, then Netflix faced a short-lived but potentially stark churn uptick in September due to controversy around Cuties," he wrote. "We think this could weigh more heavily on third-quarter net adds than investors realize, so we reduce our estimate for global streaming net adds. ... Given how strong Netflix is as a service we’re loathe to get too negative, but our churn analysis does imply some meaningful pressure."
Cahall said September churn rates may have jumped as much as 8X over its usual extremely low rate of 3.5 to 4 percent, as tracked by YipitData.
Cahall called the likely North American subscriber drop “a flash in the pan” that’s unlikely to last for long, but investors still should expect some impacts going into the next round of earnings.
Netflix executives already had minimized expectations for the second half of 2020, saying in their last earnings call that the company had already added 26 million subscribers in the year's first two quarters, nearly as much as the 28 million it added in all of 2019. As a result, the company’s own guidance for this quarter was only 2.5 million net subscribers.
