Analyst Pachter: ‘We Have Been Consistently Wrong About Netflix’

Netflix has been on a roll since the pandemic began, and that’s unlikely to change anytime soon, says analyst Michael Pachter.

Pachter, media analyst with Wedbush Securities in Los Angeles, has been a longtime bear on Netflix’s stock, contending the SVOD juggernaut’s fiscal success is overstated, and glosses over significant shortcomings such as debt and free cash flow.

With Netflix set to release first-quarter (ended March 31) fiscal results after the market’s close on April 20, Pachter April 15 issued a note admitting the streamer continues to defy naysayers with or without a pandemic.

Michael Pachter

The analyst says Netflix will add 6 million subs worldwide in Q1, bringing its global base to about 210 million — data points that reflect Netflix’s own guidance.

“We have been consistently wrong about Netflix,” Pachter wrote. “Netflix has executed extremely well during the pandemic, surprising us by keeping its foot on the gas pedal for subscriber growth, while benefiting from a disruption in content production schedules that allowed it to generate positive free cash flow.”

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Free cash flow is the cash a company produces through its operations, less the cost of expenditures on assets. In other words, FCF is the cash left over after a company pays for its operating and capital expenditures.

Indeed, free cash flow, or the lack thereof, has been a persistent sore point for Pachter, who argues Netflix regularly spends exorbitantly more each quarter than it generates. Since 2018, Netflix has generated more than $3 billion in annual negative FCF.

Then came the pandemic, and the streamer in 2020 produced its most successful fiscal year ever, generating $25 billion in revenue and adding nearly 37 million new subs.

Pachter now believes Netflix will generate $1 billion a year in positive FCF through 2030 — a projection the analyst contends still does not support the streamer’s $540 share price value. Pachter said he believes Netflix shares should be priced at $340.

Optimism about the company’s potential to generate free cash flow growth of more than $1 billion per year seems to us to be misplaced,” Pachter wrote. “We reiterate our ‘underperform’ rating on shares of Netflix.”

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