We’re now into the third-quarter earnings season. Netflix would be the first FAANG name to release its earnings later this week. What’s the forecast for Netflix and what are analysts expecting from the company’s earnings release?
The markets’ response to Netflix’s earnings over the last few quarters hasn’t been positive. The company has been reporting tepid growth in subscribers which has been making markets bearish on the streaming giant.
Netflix subscriber growth has been weak
In the second quarter, Netflix added 1.54 million new subscribers. In the first quarter, it had added 3.98 million new subscribers which were way below the 6.2 million that analysts were expecting. The company has added just about 5.5 million new subscribers in the first half of 2021 which happens to be the slowest pace of increase since 2013. It expects to add another 3.5 million net subscribers in the third quarter. The guidance was below street estimates.
Netflix saw splendid growth in the first half of 2020 and its streaming services were in high demand amid the lockdowns. However, as the lockdowns began to ease in the second half of 2020, its growth rates also came down. Furthermore, competition has also been intensifying in the streaming industry as many legacy media companies are also focusing on streaming.
Disney is among the legacy media companies that are aggressively investing in their streaming business. It reported 116 million Disney+ subscribers at the end of the fiscal third quarter of 2021 which was higher than the 114.5 million that analysts were expecting. The company expects subscriber growth to be tepid in the current quarter but has maintained its long-term outlook.
It expects Disney+ subscriber numbers to rise three-fold by fiscal 2024 to between 230-260 million. After accounting for Hulu and ESPN+ subscribers, the company expects to have been 300-350 million subscribers by the end of 2024. The company had announced the guidance last year and has reiterated it a couple of times.
Netflix earnings estimates
Analysts polled by TIKR expect Netflix to post revenues of $7.48 billion in the third quarter—a year-over-year rise of 16.3%. The revenues are expected to rise 15.6% and 13.1% respectively in the next two quarters. The company is expected to post an adjusted EPS of $2.56 in the quarter, 47% higher than the corresponding quarter last year.
Meanwhile, the company might end up surprising on the upside on the net subscriber numbers considering the popularity of “Squid Game.” That said, the subscriber numbers in the third quarter coupled with the guidance for the fourth quarter would be the key metrics to watch in the company’s earnings release.
According to the forecast estimates compiled by TipRanks, Netflix has an average price target of $645.57, which is a premium of only about 3% over current prices.
Of the 32 analysts covering the shares, 24 have rated the shares as a buy or higher, while the 5 analysts have a hold or equivalent rating on the shares. Three analysts have a sell rating for the shares.
Recent analyst action
Wall Street analysts seem to be having a mixed opinion on Netflix. Earlier this month, Guggenheim maintained its buy rating on the shares while raising the target price from $600 to $685. “As we have previously noted, the company’s focus on developing a sustainable global asset base should further strengthen its content development leadership position, driving member growth and pricing power,” it said in its note.
Notably, while the streaming war has been heating up, Netflix has managed to maintain its premium pricing as compared to its peers. The company is increasing the value proposition of its streaming service by adding video gaming as part of the package. It does not intend to charge extra for the offering. However, adding gaming would help the company maintain its premium pricing.
Streaming versus linear TV
Bank of America also reiterated its buy rating on Netflix last month and said that it believes the company would continue to snatch market share from linear TV. In its previous earnings call, citing Nielson data, Netflix had said that the share of streaming was only about 27% in the US. The ratio is much lower in most other countries, especially in emerging economies. Disney believes that its total addressable market is 1.1 billion households globally. To put that in perspective, Netflix is expected to have just above 200 million global paying subscribers at the end of the third quarter.
Meanwhile, last month, Benchmark reiterated its sell rating on Netflix shares. “We maintain our Sell rating and $448 Netflix price target despite strong overall September stock performance. Anticipated Fed tapering removal and China’s Evergrande moment may prioritize valuation and demonstrated growth relative to naked price momentum,” it said in its note.
For the most part of the year, Netflix was the worst-performing FAANG share and was trading negative for the year for quite some time. However, the shares bounced back in September even it was the worst month since March 2020 for the S&P 500. The popularity of “Squid Games” helped the shares move higher.
Netflix is now the third best performing FAANG share in 2021 and is within a striking distance of Facebook, which is the second-best performing FAANG. Facebook shares got hammered recently amid the whistleblower scandal.
Meanwhile, after the steep rise over the last month, Netflix’s valuation multiples also appear a bit stretched. The shares trade at an NTM (next-12 months) PE multiple of 58.2x which is above the one-year average of 53.8x. Notably, amid the expected increase in interest rates, growth names might appear less attractive.
To be sure, Netflix has a strong competitive position in the streaming industry. The industry is expected to see secular growth over the last decade as entertainment moves from linear TV to streaming. That said, the growing competition would also mean that Netflix would have to keep investing heavily in content which might pressurize the bottomline.
To sum it up, while the long-term forecast for Netflix and the streaming industry looks positive, the current risk-reward is not as favourable as it was a month back.
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We’re now into the third-quarter earnings season. Netflix would be the first FAANG name to release its earnings later this week. What’s the forecast for...