Netflix may struggle for a successful sequel to early pandemic subscriber rush

Netflix may struggle for a successful sequel to early pandemic subscriber rush

Netflix Inc. had a record-setting first half of the year, but the encore may not receive stellar reviews.

When Netflix

reports fiscal fourth-quarter earnings Tuesday, investors will be keenly trained on net paid subscription additions, after the company greatly benefited from a surge in subscribers in the first half of 2020 — net additions of 25.86 million — during the teeth of a pandemic. Netflix now faces diminished expectations after reporting only 2.2 million new subscribers in the third quarter amid heightened competition from the likes of Walt Disney Co.’s

Disney+, Apple Inc.’s

Apple TV+, AT&T Inc.’s

HBO Max, Inc.’s

Prime Video, and Comcast Corp.
home of Peacock.

In early December, for example, Disney said Disney+ had reached 86.8 million paid subscribers, a target that Disney expected to reach in 2024. In response, company executives issued a new target of 230 million to 260 million subscribers by the end of fiscal year 2024.

Netflix expectations for the fourth quarter headed the other way after the explosion in new customers during the early days of the pandemic. Analysts were expecting nearly 9 million new customers as of the end of March, but those expectations have come down to less than 6.5 million as of Friday.

To take advantage of its first-half subscriber burst, Netflix in October announced a U.S. price hike for its standard and premium plans, which should help its financial numbers. Still, analysts like Monness Crespi Hardt analyst Brian White see “difficult [year-over-year] comparisons” arriving in the first half of 2021.

Read more: Netflix increases prices in U.S. after wave of pandemic subscription additions, stock jumps

As Loop Capital analyst Rob Sanderson observed in a Jan. 13 note, Netflix shares underperformed the past six months, declining 10% while the S&P 500 index rose 19%. In that time, he said, the market rotated “away from the early COVID winners to those with more recovery exposure.”

“We think investors are focused on tough 1H subscriber comps, a back-end loaded year for content, expected price-related churn and elevated competition from streaming platforms,” Sanderson said.

Content will likely be a major theme of the report and connected interview of top executives, after previous statements that Netflix was running out of completed shows and movies toward the end of the year, as COVID-19 shut down production on many projects. Last week, Netflix announced about 70 original films are set to be released throughout 2021, with at least one new movie released every week. The list includes blockbuster productions with talent such as Meryl Streep, Leonardo DiCaprio, Dwayne Johnson, and Idris Elba.

That will be important as Netflix competes with Disney+ and other services with blockbuster movie properties, including HBO Max. AT&T’s WarnerMedia announced that HBO Max subscribers will be able to view the entire Warner Bros. lineup of 17 movies planned for 2021 on the same day they debut in theaters at no extra charge. Last month, the strategy was put to test in the U.S. with ‘Wonder Woman 1984’ available on HBO Max the same day it was released in theaters.

What to expect

Earnings: Analysts on average expect earnings of $1.35 a share, which would be an increase from $1.30 a share in the fourth quarter of 2019. The effects of the price hike are baked in, as the estimate has risen from 92 cents a share on Sept. 30.

Contributors to Estimize, a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others, are also projecting earnings of $1.35 a share on average.

Revenue: Analysts on average expect Netflix to report $6.6 billion in fourth-quarter revenue, according to FactSet, up from $5.5 billion the year before.

Stock movement: Through Wednesday, shares are up 50% over the past 12 months, with most of the gains coming early in the pandemic, after the cancellation of nearly all live-entertainment events because of COVID-19. The S&P 500 index

has increased 16% in the past year. At $218.4 billion, Netflix’s market value is more than that of AT&T.

What analysts are saying

— “We estimate Netflix has by far the most shows with an IMDB rating of 5+ (265, triple those of #2 Hulu). Comparing this and its dozens of high-quality films (based on IMDB rating of 7.5+) makes Netflix at $14/mo worth about 5¢ per title, also triple the value of the #2 OTT service, Amazon Prime.” — Macquarie Research analyst Tim Nollen, while reiterating neutral rating and $500 price target on Jan. 13.

— “We are projecting [fourth quarter] global streaming paid net additions of 5.9 million, to 201 million, up 20% year-over-year. This equates to [fourth quarter] global streaming revenue of $6.52 billion (up 21%).” — Monness Crespi Hardt analyst Brian White, while maintaining a buy rating and a price target of $600 on Jan. 11.

— “With consumers staying home amid colder weather & limited social activities, we expect Netflix engagement to remain high.” — Cowen analyst John Blackledge, while maintaining an outperform rating and raising Netflix’s price target to $650 from $625 on Jan. 7.

— “We believe a significant part of what turns these relatively good shows [‘The Tiger King’ and ‘The Queen’s Gambit’] into global sensations is what we call ‘the Netflix Factor’ — Netflix’s unique ability to leverage its recommendation algorithms and massive platform to amplify the impact of its content, which makes Netflix a uniquely attractive platform for the content producers.” — RBC Capital Markets analyst Mark Mahaney, while affirming an outperform rating and a price target of $630 on Dec. 15.

— “Despite Netflix’s strong 2020, they lost market share in an increasingly competitive market, with Disney significantly growing share of total streaming subscription revenues,” eMarketer analyst Eric Haggstrom said on Jan. 12. “Netflix is betting that a strong original content release slate will keep viewers engaged and churn low in 2021 even as they raise prices. It will be difficult for Netflix to continue to grow its audience in 2021, but they’re putting themselves in position to continue to build off a strong 2020.”

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