Netflix (NFLX) is scheduled to report results of its third fiscal quarter after market close on Tuesday, October 20. A video interview with Netflix executives, including CEO Reed Hastings, 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 certainly been super-charged by the COVID-19 pandemic.
In the fiscal second quarter, the company added a "Q2-record" 10.1M paid memberships, versus 2.7M in last year's Q2. "The positive variance relative to our 7.5M forecast was due to better-than-forecast acquisition and retention. In the first half of this year, we've added 26M paid memberships, nearly on par with the 28M we achieved in all of 2019. However, as we expected, growth is slowing as consumers get through the initial shock of Covid and social restrictions," Netflix stated in its last quarterly letter to investors.
For Q3, Netflix has forecast 2.5M paid net adds, versus 6.8M in the prior year quarter. "As we indicated in our Q1'20 letter, we're expecting paid net adds will be down year over year in the second half as our strong first half performance likely pulled forward some demand from the second half of the year. In addition, Q3'19 included the positive impact of new seasons of both Stranger Things and La Casa de Papel (aka Money Heist). We continue to view the quarter-to-quarter fluctuations in paid net adds as not that meaningful in the context of the long run adoption of internet entertainment which we believe provides us with many years of strong growth ahead," Netflix stated in its last quarterly letter.
2. COMPETITION: In the company's last quarterly letter, CEO Reed Hastings said: "All of the major entertainment companies like WarnerMedia, Disney and NBCUniversal are pushing their own streaming services and two of the most valuable companies in the world, Apple and Amazon, are growing their investment in premium content. In addition, TikTok's growth is astounding, showing the fluidity of internet entertainment. Instead of worrying about all these competitors, we continue to stick to our strategy of trying to improve our service and content every quarter faster than our peers. Our continued strong growth is a testament to this approach and the size of the entertainment market."
3. BULLISH VIEW: On October 14, Goldman Sachs analyst Heath Terry raised the firm's price target on Netflix to $670 from $600, telling investors that he expects the company to report Q3 results "well above" guidance and consensus expectations, including roughly 6M net subscriber additions. While management is likely to continue to guide conservatively, Terry thinks consensus estimates for Q4 and beyond remain too low given growth in content on the platform, a lack of competition for entertainment hours and spend, and more time being spent at home. Terry, who keeps a Buy rating on the shares ahead of the company's earnings report, maintains Netflix on the firm's Conviction List as well.
About a week prior to that note, JPMorgan analyst Doug Anmuth said his analysis of Apptopia download data suggested Netflix Q3 subscriber net additions of 5.4M. As such, the analyst increased his Q3 net adds estimate to 5.1M from 3.1M, well above the company's guidance of 2.5M. He added that that time that he believed buy-side expectations were for 4M-4.5M net adds, stating that he feels sentiment is "certainly more mixed than into recent quarters." Anmuth kept an Overweight rating on Netflix with a $625 price target.
4. BEARISH VIEW: On September 28, Benchmark analyst Matthew Harrigan lowered the firm's price target on Netflix to $420 from $425 and kept a Sell rating on the shares, citing his view that the market continues "overestimating Netflix's sustainable total category dominance" relative to its global streaming total addressable market. Original programming production from Disney+ (DIS), Hulu, Amazon Prime (AMZN), and HBO Max (T) is "apt to be of comparable and sometimes higher quality than Netflix programming - if lower volume," argues Harrigan. However, Harrigan noted at that time that he does not expect lasting U.S. cancellation fallout from the "Cuties" controversy.
5. CUTIES: In September, Senator Ted Cruz announced that he had sent a letter to Attorney General Bill Barr calling on the Department of Justice to investigate whether Netflix, its executives, or the makers of the film "Cuties" violated any federal laws against the production and distribution of child pornography.
In a note to investors later in the month, Wells Fargo analyst Steven Cahall said that according to reports, Netflix faced a short-lived but potentially stark churn uptick due to controversy around "Cuties." The analyst said then that he thought this could weigh more heavily on Q3 net adds than investors realize, and reduced his estimate for global streaming net adds from 5M to 2.5M. Given how strong Netflix is as a service, he is "loathe to get too negative," but his churn analysis did imply some meaningful pressure. Nonetheless, Cahall noted that he is "not ready to make the call that Netflix will see negative net adds in Q3." He has an Equal Weight rating on Netflix shares.
