Netflix downgraded at KeyBanc after streamer shows decelerating growth
Marvin Samuel Tolentino Pineda/iStock Editorial via Getty Images


In the wake of Netflix's (NASDAQ:NFLX) disappointing fourth-quarter results and first-quarter guidance, KeyBanc has downgraded the stock, citing lower growth which should compress its earnings multiple.
Analyst Justin Patterson lowered his rating to sector weight, down from overweight, noting that the change to a "low-double-digit-grower" will likely cause investors to look at it in a traditional price-to-earnings lens as opposed to enterprise value-to-sales.

"Rather, we believe investors will focus on a GAAP P/E of ~28x 2023E P/E (based on after-hours prices) and the degree paid net adds need to accelerate in 2H to surpass 20M," Patterson wrote in a note to clients. "Net, we see few catalysts."
Netflix (NFLX) shares were down 19.5% to $409.16 in pre-market trading after it released earnings results Thursday after the market closed.
Patterson noted that Netflix generated more revenue and earnings this quarter due to operating margin performance, but its guidance for just 2.5 million subscribers was below his and Wall Street's estimates of roughly 6 million subscribers. In addition, operating margin guidance of 19-20% was "well below" his and Wall Street's estimates of 22% and 23%, respectively.
With lower subscriber additions, which Netflix management said "remain a challenge post-1H20's COVID-19 acceleration," according to Patterson, the analyst would have expected stronger trends entering the quarter. With the second-quarter usually the softest, the second-half of the year has to see a net addition of at least 20 million subscribers.
"Nevertheless, we believe Netflix is poised for declining operating income and EPS growth through 3Q22E," Patterson added.
He acknowledged that Netflix (NFLX) could grow subscribers, aided by price cuts in India and the churn in the U.S. and Canada could be "less disruptive than we believe," while adding the next seasons of "Bridgerton" and "Stranger Things" could be catalysts to boost subscribers.
On the company's conference call, Netflix (NFLX) co-CEO Ted Sarandos said there will "absolutely" be a second season of the global phenomenon "Squid Game," with other members of the executive team calling the business healthy.