Netflix Q3 2021: brillant quarter, but investors are worried
This story originally appeared on Best Stocks
Netflix earned $3.19 per share on $7.48 billion in revenue. The earnings figure exceeded the $2.56 expected by Refinitiv analysts, but the revenue figure was in line with those estimates.
According to StreetAccount, the company also added 4.4 million paid net subscribers, exceeding the 3.84 million expected. However, investors are worried about Netflix stock forecast.
The massive success of the Korean production “Squid Game” aided the quarter. According to Oppenheimer analyst Jed Kelly, who raised his target price from $620 to $750 per share, the popularity of that show demonstrated a significant growth path for the company in the years ahead.
′′”We believe NFLX’s massive hyperlocal production operations (local TV/film in 45 countries) combined with the ability to distribute content globally is creating a wider moat that, in our opinion, should allow it to replicate more Squid Game-type sensations over the next decade,” according to the Oppenheimer note.
“While some may have expected a higher 4Q outlook based on Squid Game, we believe the hit TV show provides NFLX with greater visibility and confidence in the quarter,” according to the JPMorgan note.
However, Michael Nathanson of MoffettNathanson, who has a neutral rating on the stock, is skeptical about how valuable this part of the business will be in the future.
“We would argue that Netflix’s strength is not in the specific greatness of their content development, but in their currently unrivaled combination of global content spending, mass reach, advanced navigation, and content surfacing systems with front screen amplification.” While this is a moat, we don’t believe it is as deep as Google’s search business, Amazon’s delivery and logistical prowess, or Apple or Microsoft’s ecosystems,” Nathanson wrote in a note.
The quarter was also insufficient to persuade Deutsch Bank to increase its bullishness, as the firm downgraded the stock to hold from buy due to valuation concerns.
In premarket trading, Netflix shares were down more than 2%. Here are the reactions of the other major Wall Street firms to the earnings report.
Citi has a neutral rating.
“NFLX reported strong third-quarter results, with operating income and EPS outperforming the market by +13 percent and +25 percent, respectively, and revenue remaining flat.” The fourth-quarter net add guidance of 8.5 million was in line with current expectations, though production timing and cash content spend are expected to weigh on operating margins and FCF. Overall, NFLX had a strong third quarter, with net adds expected to be broadly in line for the fourth quarter. As a result, we anticipate a positive start to the shares.”
Bank of America – Buy rating, price target raised from $680 to $750
“Recently successful content releases have increased our confidence in Netflix’s return to strong growth, despite tough near-term comps.” We continue to believe that Netflix has a long runway to increase its market share from linear TV, and we believe that it is in a strong position to raise prices as its engagement grows.”
Credit Suisse has received an outperform rating.
“Given the 20% increase in shares over the last three months, investors will be looking for any flaw.” To us, subscriber growth and margin guidance for 4Q could be conservative, and evidence supported a 2022 return to ‘normal’ as management indicated they felt the service was through the pandemic pull-forward, competition is not having a noticeable impact so far, content is driving a post-pandemic rebound in growth, and management believes the service still has pricing power.”
Barclays – Overweight rating, price target raised from $625 to $675.
“While Q3 net adds and Q4 guidance were in line with consensus expectations, they effectively point to an average of 27.5mm subs across ’20 and ’21 (same as ’19), which should provide some relief to investors concerned about a structural slowdown.” Netflix’s north star a few years ago was ‘…to be HBO before HBO became us,’ according to Ted Sarandos, and HBO is no longer even in Netflix’s rearview mirror. The way management frames new opportunities appears to indicate that the goal now may be to outperform Disney’s flywheel.”
Cowen – Outperform rating, price target raised from $650 to $750.
“NFLX delivered solid 3Q21 results, with paid net adds of 4.4MM exceeding the guide of 3.5MM and exceeding our / cons forecast, with APAC accounting for half of net adds.” Lower costs drove an increase in operating income of 13% above our forecast. The 4Q21 net adds guide of 8.5MM is driven by an extremely strong film and episodic content slate.”
Raymond James has a market performance rating.
“The solid 4Q guide goes some way toward assuaging concerns about the long-term viability of demand trends, and a more balanced content pipeline in 2022 should usher in a return to normalcy.” Despite rising competition from other streaming services and forms of entertainment, premier Netflix content continues to move the entertainment needle like few others.”
Baird has an outperform rating.
“NFLX reported solid Q3 results yesterday, including a subscriber beat driven by APAC and EMEA.” Q4 subscriber guidance appears to be solid as well, though it falls just short of consensus expectations. Prior to the release, we questioned whether that would be sufficient given the recent stronger stock performance, but we remain optimistic in the long term. We would be more aggressive buyers on any weakness given our strong market position and ramping up content production.”
Atlantic Equities is rated as Overweight.
“The market may have expected more given Squid Games, but the show had no material impact on the guide given the abundance of other content already scheduled for the quarter.” We are reiterating our 25m adds forecast for 2022 in our Q4 guidance, which implies 27.5m average adds for 2020/2021. We continue to believe Netflix will have more than 300 million subscribers by the end of 2025, and we maintain our PT of $780, based on 45x 2023 EPS. We believe that the in-line guide will aid in restoring investor confidence.”
Overweight rating for Piper Sandler
“We recently increased our NFLX target, which seems appropriate given the results.” The Squid Game has gone viral all over the world. NFLX users are reenergized about content, which should continue into the fourth quarter. NFLX’s long-term subscriber potential remains vast, led by APAC and EMEA.”
Stifel – Buy rating, with a price target of $690 up from $650.
“Netflix reported 3Q results ahead of consensus, adding +4.4mm subscribers, approximately 900K more than prior guidance.” Netflix anticipates +8.5 million new subscribers in the fourth quarter, slightly higher than the consensus of +8.4 million. Following tonight’s results, we are increasingly confident that Netflix is on track to resume its normalized cadence of annual subscriber additions.”
Loop – Purchase rating
“The stock has been on a tear over the last month. We anticipate that it will digest some of its recent gains and begin to rise as the new content generates significant engagement. Longer term, we believe NFLX is one of the clear winners of the streaming wars and that its value will continue to rise as streaming continues to take share away from linear TV.”
UBS has a Buy rating.
“3Q subs outperformed the market; expect further acceleration in 4Q.” Ramping up content production and the return of popular series drove 4.4M sub net adds in 3Q, outperforming management’s 3.5M forecast and the street’s 3.8M….. We continue to believe Netflix is a long-term winner with significant scale, penetration upside, and pricing power, all of which support higher margins and ramping FCF/sh, with franchise extension as an option.”
Goldman Sachs – Neutral rating, $595 price target up from $590.
“At current levels, we continue to see the risk/reward on the shares as evenly weighted.” Netflix maintains a long-tail opportunity centered on media consumption hours, as well as the potential for mature market pricing power. Revenue growth, on the other hand, is slowing (as the subscriber base creates tougher comps and competitive intensity remains high). Looking ahead to 2022, content spending is expected to remain high as Netflix builds and scales toward its broader global ambition centered on global media consumption trends.”
Jefferies has a Buy rating.
“This is about as subdued a quarter as it could have been.” 8.5MM paid net adds are roughly in line and appear to be sufficient to maintain recent price strength; stock is down only 1.5 percent after hours. It’s natural to wonder what the 3Q results and 4Q guide would have looked like without Squid Game, but management insists that no single piece of content is sufficient to significantly drive paid net adds given the platform’s size. Nonetheless, the popularity of a Korean show must have aided APAC.”
Morgan Stanley – Overweight rating, price target of $700 raised from $675 to $700.
“The strong 4Q guidance follows a better-than-expected 3Q and strengthens the investment case for NFLX shares as it begins to exit the COVID-related impacts to the business over the last 18 months.” We are more confident in our ’22+ net adds,’ with APAC strength being especially encouraging.”
Canaccord Genuity – Buy rating, price target raised to $750 from $650.
“Netflix reported strong third-quarter results, with subscriber growth exceeding expectations thanks to an improved content slate (particularly in the APAC and EMEA regions), and operating margins exceeding guidance….”
We believe that Netflix’s robust pipeline of original titles and ongoing investments in diverse video and gaming content will continue to support strong subscriber growth and pricing power in the future.”
KeyBanc – Overweight rating, price target raised from $670 to $690.
“Netflix reported a solid third-quarter performance, reflecting solid performance from returning (e.g., Money Heist Part 1, Sex Education) and new (e.g., Squid Game) originals.” The 4Q guidance of 8.5M is slightly higher than the consensus. Given the momentum entering the quarter and Netflix’s unprecedented 4Q slate (e.g., Money Heist Part 2, The Witcher, major films, etc.), we believe estimates are biased upward, particularly as APAC ramps.”
Pivotal has a Buy rating and has raised its price target to $750 from $700.
“We continue to believe in the Netflix story, as NFLX provides consumers with an increasingly compelling entertainment experience on virtually any device, without commercials, at a still relatively low cost.” In the end, we believe that very few players can (or will) be able to match NFLX’s content spend levels, and that NFLX will eventually be the dominant global SVOD player, with Disney +/Hulu serving as a complementary service and Amazon on the periphery.”
“Over time, NFLX’s total sub growth metrics have become less linked to its economics, as sub growth is driven by lower ARPU regions.” For example, we believe that of the total paid net ads of 4.38mm in 3Q21, roughly half (2.18mm adds) came from APAC at a $9.60 ARPU, driven in part by the popularity of Squid Games’ launch on September 17. We believe that if NFLX loses UCAN subscribers, it will be viewed as a leading indicator for all other regions once they become as competitive as the US is today.”