Shares of Netflix (NASDAQ: NFLX) are still down from their peak, but the odds of a full reversal are improving. The Q1 results were mixed, but factors within the report suggest business will accelerate through the end of the year. This has the analysts shifting their sentiment and targets, and the takeaway from the activity is bullish. The caveat is that current targets may cap gains near recent highs, at least in the nearer term.
In this scenario, the stock will trend sideways until later in the year, when Q2 and Q3 results are due. If those results match the market’s expectations, the analysts may continue raising their targets and drive this stock above the $400 level. If not, Netflix shares may be set up for another significant decline.
Netflix Moves Lower On Mixed Results
Netflix moved sharply lower following the Q1 release because the news is mixed, and the expected roll-out of password lockdowns was slower than expected. That aside, the company produced 3.7% growth, although it was slightly slower than expected. The margin of error is so slim as not to matter, and the bottom line results were better than expected with an equally slim margin.
The takeaway is that results are as expected without the rollout of password protection, which is still on the table. The company says results suggest that when password lockdowns come to Netflix's largest market, the company will see an initial decline in subscriptions followed by a return to growth. People are cutting Netflix out long enough to realize they rather pay than not have it.
The margin contracted compared to last year, which was expected, but the contraction was less than forecast. The contraction is primarily due to FX headwinds not expected to ease this year. The operating margin came in at 21%, which is down 400 basis points compared to last year, and contraction is expected to continue in the coming quarters. Regardless, the $2.88 in GAAP earnings is more than sufficient to sustain operations, repurchase shares at the current pace and build cash. That means, and this is a quote from the conference call, that “repurchases will accelerate.” The company now has about $2.4 billion in excess cash on the balance sheet; it could use it all and have enough to maintain its recently acquired Investment-Grade debt status.
The Guidance Is Good And Possibly Cautious
Netflix is guiding Q2 revenue growth to 3%, which is good but slightly short of the Marketbeat.com consensus estimate. The company is also expecting another 200 basis point contraction in the operating margin but for top and bottom line results to improve in the 2nd half. The salient point is that guidance does not excite the market and will weigh on the price action in the near term. This may result in a pullback in share prices but set the stock up for a rebound later in the year.
The post-release action has the market down about 2.5% in active trading. The move has found support at the $320 level, but that is not confirmed. If the market can sustain support at this level and above the 150-day moving average, it may begin to rebound soon. If not, this stock could wallow within its current range until later in the year. In that scenario, a move to $290 is not out of the question.