Netflix NFLX doubled its own subscriber growth estimates in the first quarter, boosted by the initial shock of the early lockdown period, and followed that performance up with another big subscriber beat in Q2. The streaming TV firm has been at the forefront of the next wave in entertainment for years and now the coronavirus has seen Hollywood push back nearly all of its theatrical releases, which could benefit Netflix.
So let’s see what to expect from Netflix’s third quarter results that are due out on October 20, and try to help investors determine if it’s still time to buy NFLX for the long-haul…
The Only Game in Town
Netflix added 15.8 million paid users around the world in Q1 to crush its 7 million guidance that it provided before the coronavirus changed things dramatically. NFLX then pulled in over 10 million in the second quarter to blow away its own 7.5 million projection.
The streaming company added 26 million paid subscribers during the first two quarters of FY20, which is just 10% less than it accumulated in all of 2019. Netflix closed last quarter with 192.95 million global paid subscribers.
The coronavirus has created a unique situation. There are hardly any movies in theaters and the release dates are being pushed back by months and even years, until studios feel confident people will show up to crowded theaters.
The early numbers suggest this will take a while. And Regal Cinemas, which is the second-largest U.S. cinema chain, recently announced that it’s closing its doors again, not that long after reopening, citing some of the aforementioned problems. This creates a chance for streaming to thrive even more.
The largest streaming TV firm in the world does face competition from newcomers such as Disney+ DIS and Apple TV+ AAPL, as well as HBO Max T, Amazon AMZN, and others. Luckily for Netflix and the other streaming players, the industry is not a zero-sum game. Consumers often subscribe to multiple platforms since, unlike Apple Music vs. Spotify SPOT, the streaming TV firms offer, for the most part, vastly different content libraries.
Taking a near-term, coronavirus view, Netflix stands to benefit greatly as movie theaters, concerts, and sports with fans in attendance will be some of the last things that feel normal, even as the economy reopens.
More importantly, NFLX is set to grow as part of a secular trend that isn’t likely to reverse, as millions of more people are projected to cut the cord over the next several years alone. And once more people get used to not seeing ads and watching things from the comfort of their own homes, movie theaters could face further challenges.
Netflix has spent the last several years beefing up its own original content library, with everything from big-budget movies to reality TV. This has cost the company billions and billions of dollars and it continues to take on debt to fund its content push that is more necessary than ever as the biggest companies in the world go all-in on streaming.
Wall Street isn’t worried about NFLX’s growing debt-load yet. And investors might not need to be nervous about pandemic-related delays to its production schedule, as the same situation is happening throughout the industry.
Shares of Netflix closed regular trading Thursday at $531.79. This puts it about 6% off its early September highs, as it fights its way back over the last several weeks. Overall, NFLX stock is up around 60% in 2020 and 100% in the last year. Let’s also remember that Netflix was one of the best performing stocks of the past decade, even though it hit a rough stretch between the summer of 2018 and the fall of 2019.
Despite sitting near its all-time highs, NFLX trades at a slight discount compared to its own two-year highs in terms of forward 12-month sales at 8.4X. Investors might also be somewhat surprised and happy to know that Netflix has traded at a discount compared to Microsoft MSFT over the last year.
The only drawback to Netflix’s big first half of outsized subscriber growth is that it created what company executives called significant “pull-forward.” NFLX estimated that it would add 2.5 million new paid subscribers in Q3. This came in well below analyst estimates and would represent some of its lowest user growth in years—aside from Q2 FY19’s 2.7 million.
With this in mind, Zacks estimates call for Netflix’s Q3 revenue to climb 21.5% to reach $6.38 billion, with Q4 projected to jump 20%. Both of these would mark slowdowns compared to Q1’s 27% and Q2’s 25%.
Overall, NFLX’s fiscal 2020 sales are projected to climb 23% to hit $24.85 billion, with FY21 expected to jump 17.2% higher. These estimates would once again come in blow recent years, with FY20 expected to match FY15’s growth. Yet they still represent solid sales growth for a company of its size and age and compare favorably against some of its FAANG peers.
The bottom end of the income statement looks stronger, with Netflix’s adjusted Q3 earnings expected to surge 44% to $2.11 per share. Meanwhile, its adjusted full-year EPS figures are projected to jump 52% in 2020 and another 40% in fiscal 2021.
Netflix is a Zacks Rank #3 (Hold) at the moment that has seen positive earnings revisions recently. It’s worth remembering that NFLX stock has historically traded pretty heavily based on its subscriber results and user guidance, following its earnings releases.
Therefore, playing Netflix stock around earnings for short-term gains is often a bet on a user growth beat, which might not be a bad bet given that the coronavirus has impacted entertainment for longer than many might have thought just a few months ago. And Netflix clearly appears like a solid longer-term investment in the future of entertainment, as it remains one of the only pure-play streaming stocks, alongside Roku ROKU.
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