The streaming service giant confirmed it was expanding into gaming
Shares of Netflix (NFLX) are under pressure on Wednesday after the company reported quarterly results. While the streaming service giant's revenue and global paid net subscriber additions for the second quarter beat estimates, it reported worse than expected Q2 earnings per share and missed the consensus subscriber target for the third quarter with its guidance. Following the news, Evercore analyst Mark Mahaney called Netflix's second quarter results a "clearing event," while his peer at Piper Sandler told investors that his long-term thesis remains unchanged despite the company's "mixed" results. Still bearish on the stock, a Wedbush analyst said he views Netflix's third quarter guidance as "uninspiring" and called the company's foray into games "a misstep."
RESULTS: After market close on Tuesday, Netflix reported second quarter earnings per share of $2.97 and revenue of $7.34B, with consensus at $3.15 and $7.32B, respectively. In its quarterly letter to investors, the company said it added 1.5M paid memberships in Q2, "slightly ahead of our 1.0m guidance forecast... We believe our large membership base in UCAN coupled with a seasonally smaller quarter for acquisition is the main reason for this dynamic. This is similar to what we experienced in Q2'19 when our UCAN paid net adds were -0.1m; since then we've added nearly 7.5m paid net adds in UCAN."
For the third quarter, Netflix sees earnings per share of $2.55 and revenue of $7.48B, with consensus estimates at $2.17 and $7.48B. Additionally, the streaming giant forecasts paid net additions of 3.5M versus 2.2M in the prior year period. "We're also in the early stages of further expanding into games, building on our earlier efforts around interactivity (eg, Black Mirror Bandersnatch) and our Stranger Things games. We view gaming as another new content category for us, similar to our expansion into original films, animation and unscripted TV. Games will be included in members' Netflix subscription at no additional cost similar to films and series. Initially, we'll be primarily focused on games for mobile devices. We're excited as ever about our movies and TV series offering and we expect a long runway of increasing investment and growth across all of our existing content categories, but since we are nearly a decade into our push into original programming, we think the time is right to learn more about how our members value games," the company said.
THESIS UNCHANGED DESPITE MIXED RESULTS: Piper Sandler analyst Thomas Champion reiterated an Overweight rating on Netflix with a $600 price target after the company reported a "slightly weaker" second quarter print. Champion told investors that despite the "mixed" results, his long-term thesis "looks relatively unchanged while the near-term trajectory should improve into year-end."
Voicing a similar opinion, UBS analyst John Hodulik kept his Buy rating and $620 price target on Netflix after quarterly results, as the quarter showed the company's "resiliency" amid "difficult" COVID comps. Netflix's lower subscriptions guide is driven by the relatively thinner third quarter content slate, but with ramping production and the return of popular series, the second quarter is likely to mark the low point for subscription growth, Hodulik contended, adding that the inflecting trends should drive improved investor sentiment.
Keeping an Overweight rating on the shares, JPMorgan analyst Doug Anmuth raised the firm's price target on Netflix to $625 from $600. The analyst came away from the company's quarterly earnings report "incrementally positive" on Netflix shares. He is "increasingly confident" in the second half of 2021 content slate and sees "more reasonable" expectations into 2022 that should make Netflix "safer to own."
Deutsche Bank analyst Bryan Kraft also raised his price target on Netflix to $590 from $575 and reiterated a Buy rating on the shares post the company's second quarter results. While the third quarter guidance of 3.5M net additions was lower than the 5M-5.5M range that most investors were looking for, second quarter net adds came in above management's guidance of 1M, Kraft told investors in a research note of his own. More importantly, Netflix's second half of 2021 content slate is weighted heavily toward the fourth quarter, which should drive a significant acceleration in Q4 net adds over Q3, the analyst said. Meanwhile, Credit Suisse analyst Douglas Mitchelson raised the firm's price target on Netflix to $643 from $586 and kept an Outperform rating on the shares.
Reiterating an Outperform rating on the name, Evercore ISI analyst Mark Mahaney lowered the firm's price target on Netflix to $635 from $655. Netflix shares declined almost 20% from early to mid-2021 and have been underperforming the market year-to-date, but Mahaney now believes "shares will begin to materially outperform" following the second quarter "clearing event." Mahaney named Netflix a Top 3 Mega Cap Long, after Amazon (AMZN) and Uber (UBER).
GAMES 'A MISSTEP': Commenting on the company's quarterly results, Wedbush analyst Michael Pachter told investors that after a stellar 2020 that saw dramatic subscriber growth and a reversal of negative free cash flow trends it exhibited since 2012, Netflix delivered only limited subscriber growth and returned to negative free cash flow in the second quarter. The analyst expects further consolidation among entertainment companies, which suggests to him that less content will be available to Netflix going forward. He views Netflix's "ill-advised foray" into games as an acknowledgement that the video content pipeline is flowing more slowly, with content costs continually on the rise. That said, assuming that Netflix can expand its content spending at a slower rate than its revenue growth, it is likely that the company can deliver sustainable free cash flow growth, Pachter contended. The analyst has an Underperform rating and a price target of $342 on the shares.
PRICE ACTION: In Wednesday morning trading, shares of Netflix have dropped almost 4% to $511.34.