Analysts Clear the Air After Netflix Earnings

In addition to the disappointing subscriber add rate, there were several other things that investors need to consider. The first is that this stock was devastated after its report, but the most important issue is that Netflix may have found that even marginal price hikes are biting into new customer additions. Netflix did address a standalone service offering from HBO, saying that this is only natural and inevitable that the firm would pursue its own service — with a notion that the two would have different content.

Netflix ended the third quarter with 37.22 million members and is forecasting another 4 million members added in the fourth quarter to more than 57 million global members. Domestically, the company had streaming revenue of $877 million in the third quarter. Netflix added roughly $89 million in profit contribution, in terms of 6 million members, for its DVD-By-Mail service in the United States for the third quarter.

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Netflix added 2 million members internationally, to end with some 15.84 million members — with lower net adds than its forecast, but higher than the prior year. The company debuted in six European countries in mid-September and looks to expand from there.

The company expects fourth-quarter U.S. margin contribution rising almost 500 basis points on a year-over-year basis. As far as U.S. margin contribution, Netflix said:

Our US contribution margin grew about 500 bps to 28.6% for Q3. After achieving 30% contribution margin, likely in Q1 or Q2 of next year, we will seek to grow margins an average of 200 basis points per year for the following years. Ideally, we will achieve 40% contribution margin five years after achieving 30%. This increase in our domestic contribution margin gives us room to increase content spending as we grow, as well as substantial domestic profitability.

Prior to the impact of the earnings report, the Thomson Reuters consensus price target from analysts was roughly $473.75. That will drift lower as the ratings have been lower:

• Raised to Hold from Underperform at Jefferies
• Downgraded to Fair Value from Buy at CRT Capital
• Maintained as Buy at Canaccord Genuity, but with the price target cut to $450 from $550
• Target lowered to $450 from $550 at Goldman Sachs, which maintained its Buy rating
• Maintained Buy rating at Janney, but target cut to $470
• Outperform rating maintained at RBC Capital Markets, but the target price lowered to $550 from $600

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Netflix shares were down less than 1% or $0.53 to close Wednesday at $448.59, despite being a volatile day for the market and for Netflix. The DJIA was down more than 400 points at one point, while Netflix had a trading range of almost $21. However, Netflix shares were down a huge 26% to around $330 in the after-hours on Wednesday night and were slightly lower around $328 in the premarket session on Thursday. Shares were changing hands at $347.71 in early trading Thursday. The stock has a 52-week trading range of $299.50 to $489.29.