Netflix (NFLX) is scheduled to report results of its third fiscal quarter after market close on Tuesday, October 19. 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. Consensus forecasts recently called for about 3.7M paid subscriber additions, $7.48B in revenue and $2.56 in earnings per share for the September-end quarter.
In the fiscal second quarter, the company reported global streaming paid net additions of 1.5M, which it noted was "slightly ahead" of its 1M guidance forecast. Netflix added in its last quarterly letter to investors: "The APAC region represented about two-thirds of our global paid net adds in the quarter. As expected, Q2 paid memberships in the UCAN [United States and Canada] region were slightly down sequentially. We believe our large membership base in UCAN coupled with a seasonally smaller quarter for acquisition is the main reason for this dynamic."
For Q3, Netflix has forecast global streaming paid net additions of 3.5M, versus 2.2M in the prior year quarter. Netflix has said: "If we achieve our forecast, we will have added more than 54M paid net adds over the past 24 months or 27M on an annualized basis over that time period, which is consistent with our pre-COVID annual rate of net additions. We forecast that ARM will grow roughly 5% year over year on a FX neutral basis in Q3'21."
In a preview note to investors published on October 15, Evercore ISI analyst Mark Mahaney added Netflix to the firm's "Tactical Outperform List" while keeping an Outperform rating on the stock with a $695 price target. The analyst views Netflix as one of the "least riskiest Net stocks" in terms of consensus estimates heading into the quarter. He expects content strength into Q4 with a "muted" competitive slate. Mahaney also expects Netflix's content strength to continue into 2022 and says the recent price increases in Europe could partially mitigate average revenue per user pressure.
The same day, Morgan Stanley analyst Benjamin Swinburne raised the firm's price target on Netflix to $675 from $650 and kept an Overweight rating on the shares, telling investors that he continues to view Netflix's global scale and "singular operational focus on content production and distribution" as competitive advantages. He currently forecasts 2022 net additions of roughly 25M and noted that he expects just about 8% of net adds in 2022-2025 coming from the company's most mature region of the United States and Canada. Near-term expectations have "clearly increased," as evidenced by shares being up roughly 20% since the company's earnings report in July, added Swinburne.
2. SQUID GAME SUCCESS: In a report published on October 17, Bloomberg's Lucas Shaw reported, citing figures seen by the publication, that Netflix estimates that its latest megahit, "Squid Game," will create almost $900M in value for the company. Netflix estimates that 89% of people who started the show watched at least 75 minutes - more than one episode - and 66% of viewers, or 87 million people, have finished the series in the first 23 days. All told, people have spent more than 1.4 billion hours watching the show, Bloomberg's report stated.
Netflix released the South Korean survival TV series worldwide on September 17 and since then the original series has become Netflix’s biggest series launch yet by reaching more than 111 million fans, BofA analyst Nat Schindler recently noted. The stock price has increased 8% since September 17, Schindler also noted.
In his own recent preview note to investors, Benchmark analyst Matthew Harrigan argued that Squid Game's "euphoric creation of about $28B in equity value" since its release on September 17 "likely overshoots plausible direct benefits." The bearish analyst, who maintains a Sell rating and $493 price target on Netflix shares, admits he "did not grasp just how much Netflix stock might rally" on the show's success. However, while acknowledging that Netflix management is "visionary," such a "global pop culture breakout for a show that was rejected by every studio for a decade is also a lucky bicycle kick on goal," Harrigan contends.
3. VIDEO GAME AMBITIONS: In its last quarterly letter to investors, Netflix noted that the company is "in the early stages of further expanding into games." The company added: "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."
On October 12, Jefferies analyst Andrew Uerkwitz raised the firm's price target on Netflix to $737 from $620 and kept a Buy rating on the shares ahead of the company's Q3 report. He predicts Q3 net subscriber adds of 3.5M and a Q4 guide for about 7M-8M net adds, Uerkwitz noted. Netflix's lowest paid net adds in a fourth quarter over the past four years was about 6.6M, and the average has been about 8.2M, so he thinks anything below 7-7.5M "will disappoint," Uerkwitz said. After digesting the news of the Night School acquisition, he is growing more confident in the direction Netflix is taking in games and "likes it," added the analyst, who thinks the stock could receive a higher multiple as the value opportunity in gaming becomes more clear and success of international content such as Squid Game "lifts pressure off Hollywood."
Of note, no less than ten research analysts at Wall Street firms have raised their price targets on Netflix shares since October 1.
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