Analysts Still Wary of Blockbuster's Threat To Netflix

Netflix (NFLX) estimates on the Street are going up, up, up after the company beat estimates Monday evening and announced sales substantially ahead of analysts’ estimates for the current quarter — and announced a 24% jump in subscribers. But the key question seems to be, Can Netflix stop price chopping in the rental business, in which case earnings could be a lot higher in the future. Many seem still unwilling to give the company the benefit of the doubt despite what are substantially brighter earnings expectations Tuesday.

• Three cheers from Thomas Weisel analyst Gordon Hedge, who writes Tuesday morning that Netflix shows his “bullish thesis is playing out faster and stronger than we had expected,” noting that the company’s metrics trumped his expectations across the board, on subscriber growth, subscriber churn, cost of customer acquisition, cost of content, and profit margin. He’s raising his price target on the stock to $30, and bringing his estimates way up, to $1.201 billion from $1.186 billion in sales for this year, with a new profit estimate of 80 cents per share, from a prior 64 cents, and to $1.334 billion and 85 cents for 2008, up from a prior $1.283 billion and 60 cents. Most interesting, free cash flow per share should be $1.04 next year, more than double Hedge’s prior estimate of $.53. On the strategic front, he notes that the company said they will increase investment in online film rental technology, which Hedge expects to translate into greater video-on-demand usage. Hedge’s “best case” scenario for Netflix, he says, would be if the company could hold off on price cuts for rentals in future, in which case earnings next year could be as high as $1.64 per share.
• A more restrained enthusiasm comes from Cantor Fitzgerald’s Derek Brown, who writes Tuesday morning that, “We are raising our estimates across the board and suspect that the worst of the competitive storm may well have passed.” Again, all of Monday night’s reported metrics came in better than Brown’s estimates, with churn of 4.2% below his 4.5% estimate and gross profit at 33.9% of sales, above his 32.9% estimate. “While competitive forces continue to inhibit Netflix’s growth/profit potential, they seem to be doing so less substantively than had been anticipated by us and the company.” Still, he’s sticking with his Hold rating on the stock despite raising estimates. Despite raising his price target to $24 from $18, Brown is still cautious about the threat from BlockBuster (BBI), in particular: “It remains clear to us that Blockbuster’s efforts around Total Access [TA] continue to hinder Netflix’s subscriber growth, revenue growth, churn, and profitability.”
• Likewise Lehman Brothers’s Douglas Anmuth Tuesday morning writes that, “We remain neutral on the shares at current levels as we head into 2008 pending sustained execution and digital launch,” and he’s keeping his Equal Weight rating on the shares. In particular, Anmuth is waiting to see what happens when the company introduces its “Direct-to-TV” product, which he expects to arrive in early 2008. Like Cantor’s Brown, Anmuth is raising his price target to $24 from $17 as his earning estimate next year rises from 65 cents to 92 cents.
• The most back-handed interpretation of the results that I’ve seen comes from Pali Research’s Stacey Widlitz, who argues that the competition kinda sat this round out. “Blockbuster'’s more conservative stance on marketing benefited Netflix more than we expected,” she writes. “Clearly BBI has pulled back on marketing spend and focused on profitability.” She has a Neutral rating on Netflix shares and thinks the need to invest, and continued competition, are not to be underestimated: “We think it could be a lot higher than the $40M planned for this year. In addition, NFLX still seems to be at the mercy of Blockbuster leading the market.”

Comments

[borisb:]

Thomas Weisels best case eps of $1.64 in 2008 seems to imply or require a 5% price hike.

2007 Oct 28 04:32 PM