Netflix Stock Seesaws After Third-Quarter Subscriber Beat

Internet television network Netflix ( NFLX ) cheered Wall Street bulls and confounded bears late Monday after it smashed expectations for new subscriber additions in the third quarter and guided higher for the current quarter.

[ibd-display-video id=2372040 width=50 float=left autostart=true]Netflix stock was down 2.2%, near 198.20, in afternoon trading on the stock market today . Earlier in the session, Netflix notched a record high of 204.38.

Netflix late Monday said it signed up 5.3 million net new streaming subscribers in the third quarter, beating Wall Street's expectations for 4.5 million. For the December quarter, Netflix expects to add 6.3 million new subscribers, edging analysts' consensus view of 6.25 million.

Netflix ended the September quarter with 109.25 million streaming subscribers worldwide, including 52.77 million in the U.S. and 56.48 million in international markets.

While its subscriber numbers were a positive surprise, Netflix delivered mixed financial results in the third quarter. The Los Gatos, Calif.-based company reported earnings per share of 29 cents, up 142% year over year, on revenue of $2.99 billion, up 30%, in the third quarter. Analysts expected 32 cents and $2.97 billion.

In the fourth quarter, Netflix expects to earn 41 cents a share, up 173%, on sales of $3.27 billion, up 32%. Analysts were modeling for 33 cents and $3.15 billion.

Multiple Price-Target Hikes

Netflix stock received price-target hikes from at least eight Wall Street firms that rate it as buy: KeyBanc Capital Markets, JPMorgan, Morgan Stanley, Oppenheimer, Piper Jaffray, Pivotal Research Group, RBC Capital Markets and UBS.

Pivotal is the most bullish of the group. It upped its target to 270 from 200.

Netflix is benefiting from a "very powerful combination" of original programming that generates strong subscriber growth plus demonstrated pricing power, Pivotal analyst Jeffrey Wlodarczak said in a report.

IBD'S TAKE:Netflix stock surged above its buy range in Monday trading after the company's shares hit a buy point Oct. 5, coming out of a cup with handle . With a Composite Rating of 95 out of a best-possible 99, Netflix leads IBD's Leisure-Movies & Related group.

"Netflix offers consumers an increasingly compelling entertainment experience on virtually any device, without commercials at a relatively low cost," Wlodarczak said. "The company appears to operate in a virtuous circle, as the larger their subscriber base grows (and their average revenue per user increases) the more they can spend on original content, which increases the potential target market for their service (and reduces existing subscriber churn and increases the ability to take future price increases) and dramatically increases barriers to entry."

Netflix also has been helped by continued increases in broadband availability and speeds globally and the fact that in most of the world net neutrality regulations allow Netflix to piggyback for nearly free on the substantial investment made by cable and telecom companies, he said.

'Cringe-Worthy Cash Burn'

Netflix's stock rise has left bears scratching their heads.

Wedbush Securities analyst Michael Pachter said investors need to consider Netflix's "cringe-worthy cash burn" and growing competition.

"We don't expect Netflix to become meaningfully profitable on a cash basis for several years, and we don't expect positive free cash flow for the remainder of this decade; even then, we think that positive free cash flow will remain elusive unless the company decides to materially increase price and sacrifice growth," Pachter said in a note to clients. "We think that Netflix is destined to be a cash-burning high-growth company until it changes its strategy and accepts its fate as a highly profitable slow-growth company."

Netflix increased its 2018 content spending guidance to $7 billion to $8 billion, up from $7 billion. That compares with more than $6 billion in content spending in 2017 and $5 billion in 2016.

Pachter reiterated his underperform rating on Netflix, but upped his price target to 93 from 88.

In a letter to investors, Netflix addressed concerns about media companies like Walt Disney ( DIS ) and 21st Century Fox ( FOXA ) pulling their content from Netflix.

"Investors often ask us about continued access to content from diversified media companies," Netflix Chief Executive Reed Hastings said in the letter. "While we have multiyear deals in place preventing any sudden reduction in content licensing, the long-term trends are clear. Our future largely lies in exclusive original content that drives both excitement around Netflix and enormous viewing satisfaction for our global membership and its wide variety of tastes."

'Good Head Start' On Rivals

This quarter, Netflix is releasing the crime drama series "Mindhunter" from director David Fincher, the Will Smith movie "Bright," and new seasons of "Stranger Things" and "The Crown."

Netflix faces many competitors in the streaming video space, but has a "good head start," Hastings said. Rivals include Amazon.com ( AMZN ), Hulu and CBS ( CBS ) now and soon Apple (AAPL) and Disney will join the fray.

On an investor call Monday, Netflix Chief Content Officer Ted Sarandos noted the company's progress in making hit original films.

Last quarter, Netflix released three movies that would have been "sizable successes" at movie theaters if they had been released theatrically: "Death Note," "Naked" and "To the Bone," he said.

"We will wrap up this year with our biggest original film project 'Bright,' which is Will Smith starring with Joel Edgerton and directed by David Ayer," he said. "It's a big-budget event movie" that will show people the potential for Netflix's original movie initiative.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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