Mark Mahaney is bullish on Netflix stock despite disappointing outlook

Shares of Netflix Inc (NASDAQ: NFLX) tanked first but then recovered fully in extended hours even though the streaming giant issued disappointing guidance for its current quarter.

The mass media company now forecasts a 3.4% annualised growth in its Q2 revenue to $8.24 billion on $2.84 of per-share earnings. In comparison, analysts were at $8.5 billion and $3.07 a share, respectively.

Currency headwinds, it added, will also result in a 100 basis points hit to operating margin this quarter. But none of that was enough to make Mark Mahaney (Evercore ISI) any less bullish on the Netflix stock.

Our guess is that you’ll see a spike in churn as they roll out [password sharing] globally. But over time they will sign up. That makes us bullish on Netflix – and our north star is this advertising opportunity they face.

Year-to-date, Netflix stock is up 13% at writing.

In its first financial quarter, Netflix added 1.75 million net new subscribers versus about 2.25 million expected.

Making it worse was its outlook for Q2. The Nasdaq-listed firm expects paid net adds to remain sequentially flat – well below the consensus forecast of 3.7 million. But on CNBC’s “Closing Bell: Overtime”, Mahaney noted:

I think subs guidance is relatively constructive. June quarter is always the weakest. So, if they can maintain similar sub adds as they did in March quarter despite churn related to password sharing, I think that’s modestly bullish.

Netflix confirmed today that it will launch “paid sharing” in the United States this quarter.

On the plus side, Netflix now sees at least $3.5 billion in free cash flow this year, as per the earnings press release. Its previous guidance was for $3.0 billion only. Discussing paid sharing and a cheaper ad-supported tier further, Evercore’s Mahaney added:

Netflix solved the major problem it faced for year. It charged a premium price. This gets them out of that. They can do it while raising ARPU. You rarely see that. That’s why people will buy any major weakness in the stock.

His “outperform” rating on Netflix stock is coupled with a $400 price target that suggests about a 20% upside from here.

Earned $1.31 billion versus the year-ago $1.60 billion
Per-share earnings also tanked from $3.53 to $2.88
Revenue went up 3.7% year-on-year to $8.16 billion
Consensus was $2.86 a share on $8.18 billion revenue
Spent $400 million to repurchase 1.2 million shares