One of the most negative Netflix analysts on Wall Street explains what would make him change his tune

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  • Wedbush has one of the most bearish outlooks on Netflix of any Wall Street shop.
  • But after the company's earnings on Thursday, the firm's analysts lifted their price target and said they would reconsider their "underperform" rating should Netflix's cash burn stabilize.
  • One of those analysts told Business Insider he would reconsider his rating and price target if Netflix were to aggressively reverse its cash burn.
  • "That would get me to a $256 price target, and I'd reconsider upgrading to Neutral then," he said in an email.
  • Watch trade Netflix live here.

Wall Street analysts on Friday were heaping praise onto Netflix following the streaming giant's quarterly-earnings report, raising their price targets and recommending investors buy up the name. They cited strong content slates and solid subscriber-growth momentum.

One of the most negative firms on the name even bumped up its target, but said the company's cash burn was still a massive concern.

Netflix reported quarterly earnings-per-share estimates on Thursday that exceeded analysts' expectations, but fell slightly short of revenue expectations. The company reiterated its expectation for its 2019 cash burn to be similar to that of 2018, implying negative free-cash-flow of around $3 billion despite its roughly $1.5 billion in incremental revenue that should result from the price hike it announced earlier this week.

Now read: 'Take off the blindfold': Here's what Wall Street is saying about Netflix earnings

Michael Pachter and his team at Wedbush wrote that they expect Netflix's content spending to "trigger substantial cash burn for many years," and said future price hikes could cause a slowdown in subscriber growth. They maintained their "underperform" rating, and raised their 12-month price-target from $150 to $165 a share. Still, that's more than 50% below where shares were trading Friday.

Their new target reflects the impact of Netflix's recently announced price increase and new subscriber-growth outlook. Pachter told Business Insider what he'd need to see from the company to view the streaming platform more positively.

"I'll reconsider my rating and price target if they reverse faster," he wrote in an email. "If they go from $(3) billion in 2018 to $(1) billion in 2019 and to $1 billion positive in 2020, I will give them credit for that."

Pachter said with $2 billion of annual free-cash-flow growth, Netflix will have to pay back $11 billion and finish that by 2023, with a $7 billion free-cash-flow rate.

"20x $7 billion = $140 billion, and I would only have to discount that back for four years," he wrote. "That would get me to a $256 price target, and I'd reconsider upgrading to Neutral then."

To be sure, this outlook is the exception, not the rule, on Wall Street. Analysts surveyed by Bloomberg overwhelmingly rate the stock a "buy," and carry an average price target of $395 per share - around 16% higher from where the stock was trading on Friday.

Netflix was up 33% this year through Thursday.

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