Streaming giant Netflix (NASDAQ: NFLX) will announce its fourth-quarter earnings results after the close of trading on Thursday, January 20, EST. Investors will be watching closely to see if streaming services, including Netflix, can attract enough new customers.
Meanwhile, the market warned that earnings would fall from $1.19 per share to $0.82, down 31.1 percent year-over-year. However, experts see double-digit revenue growth in the fourth quarter to $7.71 billion, in line with guidance previously issued in the fiscal third quarter, up 16.0% year-over-year.
Previously, in the third quarter, Netflix not only met revenue expectations, but also exceeded expectations in the number of global streaming users, and the Asian market contributed the most, boosted by Squid Games. Still, the slowdown in revenue and user growth has kept the market cautious about it, with the streaming service's shares down nearly 20 percent since the release of third-quarter results in October, 6 percent below its share price at the end of 2020.
On Friday, Netflix raised membership prices in its largest markets, the U.S. and Canada, though recent trends suggest the two markets could be close to saturation in terms of user growth.
The streaming war for users seems to be becoming more and more intense, especially in terms of content spending, according to the Financial Times based on company disclosures and analyst reports to calculate the planned spending, the top eight media groups in the United States plan to spend at least $115 billion on new film and television programs in 2022.
This week, Netflix said that following the amazing success of "Squid Games", 25 new Korean films will be released this year. In 2021, Netflix will invest more than $5 billion in Korean content, which shows that this year's spending will easily exceed this figure.
Disney announced that it will invest in local creations, which is very similar to Netflix's strategy. According to the latest reports, Disney has appointed executive Rebecca Campbell as head of the newly established International Content Creation Center, which aims to expand regional content for streaming services. Campbell will be responsible for the creation of more locally produced content to drive growth in Disney+, Hulu and Star+.
Whether the huge spending on streaming media on content can be rewarded is debatable. Netflix's aggressive international expansion may have a positive impact on performance, but much of it will be offset by relatively low margins in overseas markets, while heavy capital expenditures will also weigh on profitability this fiscal year and beyond.
How will Netflix's stock perform in 2021?
In absolute terms, Netflix's stock price performance in 2021 is not bad, but compared with the S&P 500 index, it is somewhat inferior. Last year, Netflix's stock price rose 15.2 percent, but that accounted for only about half of the 30.6 percent of the S&P 500 over the same period.
Given that streaming as a whole faces a shift across the pandemic, specifically, the benefits of easy access to new subscribers at the start of the pandemic are diminishing as people increasingly return to the office or spend less time at home.
After Netflix experienced an incredibly strong 2020, the user growth rate in 2021 is the lowest in the past 5 years.
Sequential revenue growth also fluctuated significantly, slowing from 27.6% in the first quarter of 2020 to 24.2% in the first quarter of 2021, and from a 24.9% sequential revenue growth rate in the second quarter of 2020 to 19.4% in the first quarter of 2021.
Looking at the third quarter earnings report, Netflix not only met revenue expectations, but more notably, its global streaming subscriber increase also exceeded expectations, adding a net increase of 4.38 million global streaming subscribers, which is better than its own 1.54 million guidance and analysts' 3.5 million expectations.
But even as Squid Games was a success and became "the highest-rated Netflix original content ever," Netflix's revenue growth slowed further, from a 22.7 percent year-over-year increase in the third quarter of 2020 to a 16.3 percent year-over-year increase in the latest third quarter of 2021.
But Squid Games' global popularity has expanded its user base to 214 million, and management has shown confidence that there is enough room for further growth.
In addition, Netflix's fourth-quarter guidance is also mildly optimistic, with the company expecting revenue of $7.71 billion and a net increase of 8.5 million users compared to an expected 8.32 million.
Currently for the fourth quarter, the Wall Street Consensus EPS is estimated at $0.82, down 31.1% year-on-year, and Consensus's revenue is estimated at $7.71 billion, an increase of 16.0% year-on-year.
In response, more industry analysts are weighing Netflix's expectations for earnings, revenue and the most notable user growth figures when it releases its fourth-quarter quarter results and outlook.
What do institutions think?
Bank of America and Wedbush are largely positive about Netflix meeting its expected user numbers.
Nat Schindler, an analyst at Bank of America Securities, said he still expects Netflix to add 8.6 million new subscribers in the fourth quarter and 7.3 million in the first quarter of this year. "We expect to see some high-rated, high-rated Netflix TV shows continue to air, which may drive user growth."
Michael Pachter, an analyst at Wedbush, said Netflix's early entry into the streaming TV industry, combined with its large user base, "provides the company with an almost insurmountable competitive advantage" over competitors. Pachter said much of Netflix's future subscriber growth is likely to come from "lower monthly subscription price points in less developed regions."
Netflix itself said it expects to add 8.5 million new users in the fourth quarter, a figure that has been questioned by some analysts.
JPMorgan Chase's Doug Anmuth cut Netflix's share price target to $725 from $750 a share and said he expects the company to add only 6.25 million new subscribers in the fourth quarter. Anmus said there are data that show that after Netflix started the season with the success of the show "Squid Games", the rest of the show was lightly downloaded.
Deutsche Bank analyst Bryan Kraft also lowered the company's target price for Netflix from $590 to $580, and Kraft told investors in a research note that the third-party data used to measure the company's net increase in the fourth quarter was "not optimistic." Analysts cut their fourth-quarter net incremental forecast to 7.25 million through an analysis of Google's trend data.
While more analysts remain cautious, Truist analyst Matthew Thornton maintained his buy rating and $690 price target ahead of the fourth-quarter earnings report. His view of the stock is "cautious" and the net increase is expected to be as low as 6.3 million. Thornton added that he had fine-tuned his model to reduce the number of subscription memberships, but his annual revenue forecast had little change when offset by price increases.
However, Schindler said he was "skeptical" of the negative sentiment surrounding Netflix's new user data.
"It's very likely that Netflix didn't meet that guidance goal, and they've had it in the past," Schindler said. "But it's fair to say they beat the guidance far more times than they make mistakes." And Netflix's huge content lineup in 2022 can drive user growth. ”
However, on profitability, analysts remain optimistic about its newly announced price increases, with Pachter saying Netflix can maintain its earnings "as long as it can continue to raise subscription prices", which will boost profitability in 2022.
The recent price increases have clearly increased some confidence, and Anmuth also said that the price increase will drive more than $1 billion in incremental revenue, although the continuous price increase "may bring friction", but Netflix is willing to exchange a small number of users for incremental revenue. He believes incremental revenue will help fund increased content spending, and he expects cash costs of $19 billion in 2022 to "also add some cushioning to the expansion of operating margins." ”
Piper Sandler analyst Thomas Champion also reiterated its overweight rating for Netflix, with a price target of $705 ahead of the company's fourth-quarter results on Thursday. The analyst has been constructive about the stock for a long time, saying there are structural opportunities in streaming video.
However, Champion also said that the fourth quarter content was strong, and the survey data "pointed to strong consumption", but concerns about the net increase in users in the fourth quarter made Netflix's recent stock price performance not good enough.
conclusion
In 2022, Netflix's growth is expected to remain stable, and the latest price increase will provide a partial buffer for its increased content spending. However, with the significant increase in competition, whether it can generate profits in the streaming war with competitors such as Disney, HBO and Amazon will be the basis for Netflix to continue to be the king of streaming.
More critically, investors will be watching closely to see if the streaming giants' huge investment is reasonable, and whether the huge expenditure on content can bring them enough new customers.