Netflix (NFLX.US) exceeded expectations in Q1 performance but faced "voting with their feet," Morgan Stanley: short-term disruptions do not change the long-term compounding story, maintaining an overweight rating.

Netflix (NFLX.US) announced its first quarter 2026 performance on April 16, with a slightly negative reaction from Wall Street. Despite a relatively stable performance in the quarter, cautious performance guidance overshadowed the financial report, leading to pressure on the stock price. However, Morgan Stanley analysts remained unwavering and continued to be bullish on the stock of this streaming media giant. The bank reiterated its "overweight" rating on Netflix and maintained a target price of $115. Based on the closing price of $107.79 on the day of the financial report release, the target price implies a 6.7% upside potential. It should be noted that the stock has seen a significant decline from the post-financial report level, currently trading slightly below $100. The short-term issues for Netflix are evident in its lukewarm guidance, but Morgan Stanley believes that the long-term bullish thesis remains valid. Pricing power remains healthy, user retention rates have improved, and the advertising business continues to expand, laying the foundation for building high-quality assets with compounding growth potential. Morgan Stanley believes that the post-earnings decline is more due to short-term factors rather than a reversal in Netflix's long-term compelling story. Netflix's first quarter: Strong performance, weak outlook Netflix exceeded revenue expectations, reaching $12.25 billion, a 16% year-over-year increase, higher than the expected $12.17 billion. Operating profit increased to $4.08 billion, an 18% year-over-year increase, surpassing the expected $3.94 billion, but the 31.7% operating profit margin did not reach the forecasted 32.5%. Free cash flow soared from $2.7 billion in the same period last year to $5.1 billion, well above the expected $2.87 billion. The focus of the market was on Netflix's weak guidance: the midpoint of the full-year 2026 revenue guidance was $51.2 billion, lower than the expected $51.38 billion; the 31.5% profit margin guidance also lagged behind the forecasted 32%. In addition, Netflix announced that Reed Hastings will no longer seek re-election as chairman, leading to a post-market decline in the stock price. Netflix's post-earnings pullback is more of a timing issue Morgan Stanley believes that Netflix's post-earnings decline is entirely a timing issue. Although Netflix's first quarter revenue was strong and exceeded expectations, the bigger issue was its second quarter guidance falling short of market expectations. However, Morgan Stanley analysts believe that this is mainly related to the transmission pace of the price increase effect in the business and not a demand issue. It takes two to three months for the price increase in the US to significantly reflect in the financial data, so the impact of the March price hike on the third quarter may be greater than the second quarter. In addition, the company is facing a difficult year-over-year comparison due to the significant price increase last year. Other data support this view. Netflix reaffirmed its 12%-14% sales growth expectations for 2026, maintained the 31.5% EBIT profit margin target, and raised the free cash flow guidance from $11 billion to $12.5 billion. Wall Street's target price for Netflix post-earnings According to market data, the consensus target price for Netflix stock on Wall Street is $114.46, implying a 17.62% upside potential from current levels. Analysts' target prices range from a low of $80 to a high of $151.40, showing significant divergence in expectations for the stock's prospects. - Oppenheimer: $120 - Seaport Research: $119 - J.P. Morgan: $118 - Piper Sandler: $115 - Morgan Stanley: $115 - Barclays: $110 Netflix still has significant growth potential Furthermore, Morgan Stanley analysts believe that Netflix still has plenty of growth opportunities. By the end of 2025, Netflix is expected to have over 325 million paying subscribers and an audience size close to 1 billion. Despite impressive numbers, Morgan Stanley says that Netflix is still in the early stages of its journey in "entertaining the world." Data support this assessment: Netflix's penetration rate in addressable smart TV households is less than 45%, capturing only 7% of its $670 billion addressable sales opportunity, and accounting for less than 5% of global TV viewing time. Advertising is another major reason why Morgan Stanley remains bullish The bank believes that Netflix's advertising revenue is expected to double year-over-year in 2026, reaching $3 billion, accounting for about 6% of total sales and laying the foundation for future growth surpassing 10%. In the 12 countries where ad-supported plans have been launched, these plans account for over 60% of new sign-ups, up from the previous 50%; the ad customer base has surpassed 4,000 companies, a growth of about 70% year-over-year. Pricing power, advertising advantages, and a huge long-term growth runway are the fundamental reasons behind Morgan Stanley reiterating the $115 target price. Key risks to watch for Netflix - Controversies surrounding user engagement remain unresolved: Questions about user engagement and viewing time still exist. Although high-quality user engagement was achieved in the first quarter, if this trend reverses, the company's pricing power and user retention logic will be more difficult to support. - AI investments still need to prove their value: Netflix is investing heavily in technology and development, including AI, advertising, and gaming. The risk is that the escalating capital expenditure may exceed short-term visible returns. - Execution in the second half of 2026 is crucial: The bullish thesis relies on price hikes, advertising growth, and stronger momentum in the second half. If these favorable factors fade, maintaining a bullish stance will be extremely challenging. Netflix stock price compared to the S&P 500 index return