Don’t expect Netflix’s Q1 earnings to ‘spark joy,’ but buy the stock anyway

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 a 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 down dramatically.

Mitchelson noted that global downloads, which have shown “reasonable correlation with Netflix’s reported net additions results historically,” expanded by 35 percent in the first quarter from the year earlier period. This is 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. In fact, Mitchelson noted that “Netflix has guided 1Q19 net adds to be the 2nd smallest sequential improvement in its history.”

“We believe the reason, moreso 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 in a note titled, “Will 1Q19 Results Spark Joy?,” which is a nod to the show Tidying up with Marie Kondo.

“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 was 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, however, the stock should be a good buy for investors as the streaming giant builds on its original content such as The Umbrella Academy, Stranger Things, and Tidying Up the analyst says.

He also said recent price hikes should boost revenue-growth acceleration. Netflix announced in January price hikes ranging between 13 percent and 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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