With so many people staying home during the COVID-19 pandemic and needing to entertain themselves, Netflix (NASDAQ:NFLX) has emerged as an inadvertent beneficiary of the public health crisis. The video-streaming leader posted a massive (if unsurprising) spike in subscriber additions -- more than double what it had expected -- in the first quarter.
While management warned that the surge could potentially represent little more than a pull-forward of demand, investors and analysts remain optimistic about the company's long-term prospects. Shares soared as much as 9.5% yesterday to fresh all-time highs. Here's why.
Another blowout quarter in store?
Goldman Sachs released a bullish note on Friday, reiterating a conviction buy rating on the stock. Analyst Heath Terry boosted his price target from $540 to $670, a new Street high. The analyst believes that Netflix enjoyed record quarterly app downloads in the second quarter, with year-over-year growth in downloads hitting the highest levels since early 2016.
"We believe this [download growth] was driven by growth in content on the platform, a lack of competition for entertainment hours and spend driving churn lower, and more time being spent at home even as a number of official orders have been lifted," the analyst wrote in a research note to investors. "While management is likely to guide 3Q conservatively given the 1H outperformance and the massive uncertainty in the current environment, we believe consensus estimates for the 2H and beyond remain too low."
More specifically, Goldman is forecasting that Netflix will report over 12.5 million net subscriber additions in the second quarter, well above Netflix's guidance of 7.5 million. The company is set to release Q2 results next week on July 16.
Fresh content has long been pivotal to Netflix's ability to attract and retain subscribers. While the public health crisis had halted production, Netflix noted that it already had a strong pipeline in the works when the virus hit. Chief Content Officer Ted Sarandos said in April:
The one thing that's maybe not widely understood is we work really far out relative to the industry because we launch our shows all episodes at once. And we're working far out all over the world. So our 2020 slate of series and films are largely shot and are in postproduction remotely in locations all over the world. So and we're actually pretty deep into our 2021 slate.
Netflix is now preparing to resume production of popular original series like The Witcher and Stranger Things, among others.
Looking farther out, Terry argues that consensus estimates for the second half of 2020 are still too low. Wall Street is currently looking for $24.8 billion in total revenue this year, which would represent top-line growth of around 23% compared to 2019.