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Netflix shares fall as weak forecast dampens investor optimism

(Reuters) – Shares of Netflix Inc fell nearly 5 percent on Friday, as investors looked past its record subscriber numbers and instead focused on its lower-than-expected revenue forecast for the first quarter.

The video streaming pioneer’s shortfall in revenue expectations disappointed investors looking for a bigger payoff from the company’s recent decision to raise prices as much as 18 percent for its U.S. customers.

“Many investors we spoke with in recent days expected the price increase to flow through to improved free cash flow guide. That didn’t happen,” Bernstein analysts wrote in a note to clients.

Even so, Netflix remains the best performing FAANG stock this year with more than a 30 percent surge. Its shares recently traded at about 83 times expected earnings for the next 12 months. Stocks trading at high earnings multiples are more prone to sell off if growth targets are missed.

While investors seemed a bit disappointed, Wall Street analysts remained unfazed by the shortfall in the company’s forecast.

At least 14 analysts raised their price targets, with RBC Capital Markets pushing its estimate by $30 to $480, well past the stock’s median target of $410.

“Netflix offers a truly compelling value proposition with global appeal,” analyst Mark Mahaney wrote in a note to clients.

“(The company) still only accounts for perhaps 10 percent of all TV viewing hours in the U.S. This is growth defined, in our view.”

Netflix has seen blistering growth in the past few years and has bet heavily on international subscriber additions, spending billions of dollars to bolster its original content.

It boasts of award-winning shows such as “Stranger Things” and “Wild Wild Country” that has helped it fend off intensifying competition from Amazon.com’s Prime Video service and Hulu. The company reported 139 million paid customers at the end of December.

But that growth has come at the cost of a rising debt pile – its long-term debt at the end of 2018 rose to a staggering $10.36 billion from $3.36 billion in 2016.

Wedbush analysts, however, said that if “Netflix is able to improve its free cash flow by $1 billion per year, it will see its debt peak at $13 billion, and will be debt free in 2026”.

FILE PHOTO: The Netflix logo is seen on their office in Hollywood, Los Angeles, California, U.S. July 16, 2018. REUTERS/Lucy Nicholson/File Photo

The company said it expects free cash flow in 2019 to be similar to 2018, but sees improvement each year thereafter.

“Judging by recent moves, the rest of the media industry is more than happy to sell Netflix whatever they want as long as the bid is high enough and the check clears,” MoffettNathanson analysts said.

Shares of the company fell as much as 4.6 percent to $336.73 in early trading and were on track for its worst day in 2019.

Reporting by Vibhuti Sharma and Jasmine I S in Bengaluru; Writing by Sweta Singh; Editing by Arun Koyyur

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Sorrell’s S4 Capital seeks more deals in digital-only drive

MUNICH (Reuters) – Martin Sorrell is on the lookout for acquisitions to expand his new advertising venture S4 Capital, aiming to capitalize on the disruption sweeping the industry by pursuing a pure-play digital strategy.

FILE PHOTO: Sir Martin Sorrell attends a conference at the Cannes Lions International Festival of Creativity, in Cannes, France, June 22, 2018. REUTERS/Eric Gaillard/File Photo

Sorrell, who was ousted from WPP last April after three decades building it into the world’s largest advertising holding company, started again with the purchase of S4 as a shell and has clinched two deals so far.

He outbid WPP in July for Dutch digital advertising agency Media Monks for 300 million euros (£264.8 million pounds) and in December bought San Francisco-based programmatic advertising company MightyHive for an enterprise value of $150 million.

“It’s a good base, but we need to do more – we need to do more organically and we need to do more by acquisition,” Sorrell told Reuters on the sidelines of the DLD Munich technology conference.

Sorrell founded WPP in 1985 and stunned the advertising world two years later by launching a $566 million (£439.4 million) hostile takeover of J. Walter Thompson. Then, in 1989, WPP bought Ogilvy Group for $864 million.

This time, however, 73-year-old Sorrell wants to keep S4 digital-only and build on core competences in content and programmatic advertising, which involves automated distribution of ads across the internet.

Sorrell plans to offer digital content, analytics and distribution to help clients to reach customers in a rapidly changing media environment that he views as an opportunity rather than a threat.

He said he would be interested in buying first-party data assets, though this could be an expensive proposition. He also wants to expand S4’s geographical coverage – it now has around 1,200 staff in a dozen countries – into Germany.

“Much of it actually depends on serendipity,” said Sorrell, recalling the early years at WPP.

“Did I think we would buy a company 13 times our size in ‘87? The answer’s ‘No’. We have to see what is going to happen because the industry is in a state of disruption.”


His strategy reflects the rise of Google and Facebook to dominate online advertising. Both are ‘walled gardens’, meaning that they rather than the marketer effectively control the relationship with consumers.

Major brands, meanwhile, are seeking to re-establish a direct connection to customers and the all-important data that reveals whether they might buy a product or service.

Working with that first-party data is where Sorrell and S4 come in, by designing and delivering online advertising to the likes of viewers of video streaming service Netflix.

Sorrell’s vision of S4 as a purely digital business also reflects his thinking on the predicament faced by big advertising holding companies, including WPP.

These have lost business to the Silicon Valley giants while also becoming too big and complex to respond to rapidly changing technology and client needs.

Sorrell, still a shareholder in WPP, gave a lukewarm assessment of restructuring efforts under new management headed by Mark Read. He said that some steps – such as merging U.S. agency Young & Rubicam with digital vehicle VML – had been under discussion while he was still at the helm.

“To be fair and frank, I don’t think there’s much change, but there’s a lot of talk,” said Sorrell.

Sorrell reckons it is too soon to write off the advertising holding companies, however, singling out Japan’s Dentsu as the strongest of the global players. “It mirrors S4,” he added with a smile.

He predicts a “bumpy” year for the global economy, but the combination of a possible slowdown with attempts by the advertising industry to reinvent itself is one that is, on balance, positive for S4.

“The good news is that S4 Capital is a clean sheet of paper,” he said. “The holding companies are prisoners of history and the disruption.”

Reporting by Douglas Busvine; Editing by David Goodman

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