Netflix (NFLX) is scheduled to report results of its fourth fiscal quarter after market close on Thursday, January 20. A video interview with Netflix executives, including co-CEO Reed Hastings and co-CEO & Chief Content Officer Ted Sarandos, will follow at 6:00 pm ET. What to watch:
1. SUBSCRIBERS: Netflix's subscriber figures are a closely-watched measure of the company's growth trajectory, but one that has been complicated by the pandemic.
In the fiscal third quarter, the company reported global streaming paid net additions of 4.38M, which it noted was above its own 3.5M projection, adding that its "ending paid memberships of 214M was within 0.4% of our forecast."
Netflix added in its last quarterly letter to investors: "For the second consecutive quarter, the APAC region was our largest contributor to membership growth with 2.2m paid net adds (half of total paid net adds) as we are continuing to improve our service in this region. In EMEA, paid net adds of 1.8m improved sequentially vs. the 188k in Q2 as several titles had a particularly strong impact. The UCAN and LATAM regions grew paid memberships more slowly. These regions have higher penetration of broadband homes although we believe we still have ample runway for growth as we continue to improve our service."
For Q4, Netflix has forecast global streaming paid net additions of 8.5M, which it noted would be "consistent with Q4'20 paid net additions."
In a preview note to investors, Truist analyst Matthew Thornton said he believes investors are expecting paid member adds "well-below guidance" at 8.5M and the sell-side consensus he pegs at 8.2M members. Meanwhile, Thornton thinks the buy-side forecast could be "as low as about 6.3M."
Though Thornton thinks Q4 sentiment is "cautious," and calls the Q1 consensus net adds figure he pegs at 6.9M "a slightly high hurdle," he noted that the valuation of Netflix shares is now at or slightly-below the stock's long-term average. Ahead of the report, Thornton maintains a Buy rating and $690 price target on Netflix shares.
Recently, Deutsche Bank analyst Bryan Kraft lowered the firm's price target on Netflix to $580 from $590 and kept a Hold rating on the shares. Third party data that is used to gauge the company's Q4 net additions "has not been encouraging," Kraft told investors in his own research note. The analyst's analysis of Google trends data prompted him to lower his Q4 net add estimate to 7.25M.
Consensus forecasts recently called for $7.71B in revenue and 82c in earnings per share for the December-end quarter.
2. PRICE HIKES AND PRICE TARGETS: On January 14, Neftlix shares rallied in afternoon trading after the company confirmed in a Help Center page post that it is raising its U.S. prices. On the page, Netflix stated that "these prices apply to new members and will gradually take effect for all current members. Current members will receive an email notification 30 days before their price changes, unless they change their plan." The page shows that the company's standard plan for U.S. members now will cost $15.49 per month, an increase from the $13.99 charged previously. The basic plan in the U.S. will be priced at $9.99 per month and the premium plans will now cost $19.99.
Subsequent to that news, JPMorgan analyst Doug Anmuth said he believes the price increase Netflix announced will drive an incremental $1B-plus of revenue in 2022. Each successive price increase "could drive a bit more friction," but Netflix is willing to trade off a small number of subscribers for incremental revenue, and most of them come back anyway, Anmuth told investors. He thinks the incremental revenue will help finance increased content spending, which he projects at $19B in 2022 cash costs, and "also add some cushion to operating margin expansion." Anmuth keeps an Overweight rating on Netflix with a $725 price target.
KeyBanc analyst Justin Patterson said that Netflix's price increase was larger than anticipated, which he believes implies a 1% lift to his and Street 2022 revenue estimates. Nonetheless, the analyst left his estimates unchanged due to the proximity of earnings, which should shed light on UCAN and international performance, confidence in 2022's content slate and investment levels. Patterson maintained an Overweight rating and a price target of $620 on Netflix shares as he believes the company is better able to weather industry challenges than peers and is still poised for greater than 20% annual EPS growth.
Meanwhile, Wedbush analyst Michael Pachter also noted that a week prior to its Q4 report, Netflix announced price increases in its UCAN region. The analyst pointed out that typically, the company raises prices when its subscriber additions are strong, so he suspects that chatter about a subscriber "miss" may be misguided. Pachter has an Underperform rating and a price target of $342 on the shares.
3. VIDEO GAME AMBITIONS: In its last quarterly letter to investors on October 19, 2021, Netflix stated: "We've begun testing our games offering in select countries. It remains very early days for this initiative and, like other content categories we've expanded into, we plan to try different types of games, learn from our members and improve our game library. During Q3, we acquired Night School Studio, the maker of critically acclaimed games like OXENFREE, to help build out our game development capabilities. As a reminder, games on Netflix will be included in members' subscriptions and will not have advertisements or in-app purchases so game play is purely focused on enjoyment versus monetization."
Since that time, the video game industry has seen a shake-up with a pair of notable, major deals: Take-Two's (TTWO) announcement on January 10 that it will acquire all of the outstanding shares of Zynga (ZNGA) in a cash and stock transaction with a total enterprise value of approximately $12.7B and Microsoft's (MSFT) plans to acquire Activision Blizzard (ATVI) for $95.00 per share in an all-cash transaction valued at $68.7B, inclusive of Activision Blizzard's net cash.