ii view: are Netflix results really that bad?

With Covid-driven growth easing, we assess the outlook for the pay-TV giant.

Third-quarter results to 30 September

• Revenue up 22.7% from Q3 2019 to $6.44 billion
• Global net paid additions up 2.2 million from the last quarter
• Paid net subscriber adds up 23.3% from Q3 2019 to 195.15 million 
• Earnings per share up 18% to $1.74

Guidance:

• For Q4 2020, expects global paid net subscriber adds of 6 million vs 8.76 million in Q4 2019
• Expects Q4 earnings per share of $1.35, up from Q4 2019 of $1.30

ii round-up:

Global streaming provider Netflix (NASDAQ:NFLX) reported weaker than expected subscriber gains as pandemic lockdowns eased, live sport returned, and competition increased. 

Although largely predicted by Netflix, the third-quarter new subscriber gain of 2.2 million was way below the second quarter gain of 10 million and under Wall Street estimates of just over 3 million. 

Netflix itself had predicted a gain of 2.5 million, believing that the 15 and 10 million gains seen in the first and second quarters had pulled demand from the second half into the first. 

Netflix shares fell by 6% in after-hours US trading, although they are up over 60% year-to-date. Shares for Prime operator Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) are up by similar amounts as populations have shopped, worked and viewed more TV from home under the global pandemic. Shares for rival streamer Disney (NYSE:DIS) are down around 13% in 2020 with its theme parks previously closed under Covid lockdowns.

Subscriber gains of 28.1 million for the nine-months year-to-date exceed the 27.8 million customer adds Netflix made over the whole of 2019. Total global customers now number more than 195 million. 

The maker of series including The Crown and Stranger Things predicts fourth-quarter subscriber adds of 6 million, with earnings expected to come in at $1.35 per share. That is below the 8.76 million customer adds made in the final quarter of 2019, although above earnings per share of $1.30. 

The predicted final quarter customer gain of 6 million would leave the annual gain at 34 million, a company record and surpassing the 2018 previous high of 28.6 million. 

ii view:

Technology and the internet have allowed consumers to stream programmes to view at a time which suits them, an ability which Netflix has taken advantage of. The company is now a household name, and expansion outside the US has been rapid. Revenues in 2019 were split almost evenly between North America and overseas.  

In 2020, the Covid-19 outbreak has seen populations across the world forced to entertain themselves from home. Many under early full lockdowns turned to Netflix. Now, and as predicted by Netflix, new customer adds have slowed although the company may still achieve a record year. 

For investors, a one-year prospective price/earnings (PE) ratio of around 80 against a three-year average of over 120, suggests some of the froth is being removed from the share price. Although not directly comparable, Amazon, and another considered winner in the Covid environment for both its online retail and Prime stream services, sits on a one-year prospective PE ratio of over 100.

Despite increased competition, Netflix continues to embrace the new entrants, believing it is a sign of growth in on-demand viewing as opposed to historical linear viewing. It also remains confident that the quality of its content is high and regularly better than the opposition’s. In all, with the Covid tailwind easing, some near-term caution looks sensible. But while Netflix may not prove the winner in this latest quarter, first mover advantage may still leave it one to own long term.  

Positives: 

• Revenues and paid memberships still rising
• Heavy investment made in building a leadership position

Negatives:

• Growing competition from Disney, Apple and others
• Suffered programme making disruption due to Covid-19

The average rating of stock market analysts:

Buy