Why Wall Street Got Netflix Earnings Wrong
The streaming giant recorded its 2nd highest subscriber add quarter ever, and a record Q2, adding 10.1 million net new subscribers.
So why is the stock down? Weak Q3 subscriber guidance is overshadowing a record 2nd quarter for Netflix. Q3 guidance of 2.5 million was lower than 5.3 million consensus on Wall Street due to demand pull-forward related to the pandemic, according to some analysts.
Potential demand “pull-forward”: Netflix has been among the biggest winners from the stay-at-home trend prompted by the pandemic, adding about 26 million subscribers in the first 6 months of the year. While that is tremendous growth, many are hypothesizing that demand in the second half of 2020 has been pulled forward into the front half of the year. MoffettNathanson, which has a $390 price target, sees a possible negative chain reaction resulting from pull-forward.
“Assuming the pull-forward commentary holds, Netflix shifts their 2021 content line-up more to the back half, and 2021 price hikes, due to weaker economic growth, are not as robust, Netflix’s revenue growth will begin to decelerate to the mid double digit range with their most mature market UCAN growing in mid-to high single digits.”
Content production: Netflix expects the 2021 content slate to be even stronger than the 2020 slate despite the impact of production delays on large scale programming during the first 6 months of 2020. Jefferies analyst Alex Giaimo, who raised his PT to $550 from $520, believes Netflix will have a sizable advantage over other networks, which he says tend to operate on shorter lead times and are reliant on sports.
“Content production is a concern, but we believe Netflix is in a much better place than its competition. Output is slowly improving in certain markets, and the near-term pipeline remains intact given long lead times and a significant prior investment in originals.”
Scale = Power: The key to a competitive edge in the increasingly crowded TV streaming market is scale. The more subscribers a company can accumulate, the more power it has, according to RBC analyst Mark Mahaney, who raised his PT on Netflix to $610 and reiterated his OUTPERFORM rating.
“With ~183MM Paid Subs, Netflix has perhaps more than 3X as many subs as its closest global competitor…and whoever has the most Subs generates the most revenue which enables more content purchasing which begets more Subs which generates more revenue…”
Next major catalyst: On the call with analysts, Netflix revealed it raised prices in Mexico and Chile. In an interview with CNBC this morning, Mahaney said the next major catalyst is broad price hikes for subscriptions. He anticipates this to happen next year.
