Netflix Earnings Preview: What Wall Street Is Expecting

Netflix Logo on Computer - Getty - H 2019

Financial observers, on average, expect a subscriber gain of around 3.6 million worldwide for the latest period, per Goldman Sachs.

Many Hollywood and Wall Street eyes will be on Netflix again after the market close on Tuesday (Oct. 20) as the global streaming giant reports its third-quarter results, its first after strong subscriber gains during the first half of 2020 due to stay-at-home orders amid the coronavirus pandemic.

As always, the latest results and forecast for the just-started fourth quarter are likely to drive up Netflix's stock, with several analysts increasing their price target ahead of the earnings update.

Pivotal Research Group's Jeff Wlodarczak recently boosted his by $50 to $650, touting positive fundamental trends. "The company appears to operate in a virtuous cycle, as the larger their subscriber base grows (and their average revenue per user increases) the more they can spend on original content, which increases the potential target market for their service and reduces existing subscriber churn," he wrote.

And Goldman Sachs' Terry Heath now has the highest price target on Netflix's stock among Wall Street analysts after boosting his by $70 to $670 on Wednesday. "We expect Netflix to report third-quarter results well above guidance and consensus expectations, with roughly 6 million net subscriber additions, driven by growth in content on the platform, a lack of competition for entertainment hours and spend, and more time being spent at home," he explained.

Over the near-term, subscriber trends are expected to come in weaker than in the year-ago period though after record subscriber growth sprints during the first half of the year. Netflix has acknowledged that the second half will look much weaker in comparison.

"In the first half of this year, we’ve added 26 million paid memberships, nearly on par with the 28 million we achieved in all of 2019," Netflix said when it announced its second-quarter performance, adding: "However, as we expected, growth is slowing as consumers get through the initial shock of COVID and social restrictions."

Management, led by CEO Reed Hastings, back then forecast 2.5 million net subscriber additions for the third quarter ended in September, down from 6.8 million in the year-ago period, "as our strong first-half performance likely pulled forward some demand from the second half of the year." The third quarter of 2019 had also included the benefit from new seasons of hit shows Stranger Things and Money Heist.

Wall Street on average expects a subscriber gain of around 3.6 million worldwide for the latest period, according to Goldman Sachs.

While international subscriber growth is expected to continue, much debate on Wall Street as of late has focused on how much lower third-quarter subscriber numbers will come in compared with the year-ago period in the more mature U.S. and Canadian markets. With a marketing controversy surrounding original film Cuties being one possible factor affecting those figures, some experts are even predicting a slight subscriber drop for the latest period in the U.S. and Canada.

Needham & Co. analyst Laura Martin, who has an "underperform" rating on the streamer's stock, is more bearish than many colleagues, noting in a recent report that Netflix is a "mature" business in the U.S., and competition is "growing relentlessly." She expects global subscriber figures to only edge up slightly in the third quarter, with a domestic decline of 3.7 million.

"The French movie Cuties has the Alt-Right up in arms, calling for a Netflix boycott under hashtags #CancelNetflix and #SaveTheChildren," Martin noted. "Antenna data stated that Netflix lost 5x more subscribers during the first five days after Cuties was released versus the prior 30 days. Also, YipitData reported that Netflix's churn grew as the #CancelNetflix hashtag trended on social media and that by Saturday, Sept 12, 'disconnects were running at nearly 8x August's daily levels, and Netflix's churn hit multi-year highs'."

Wells Fargo analyst Steven Cahall recently cut his subscriber forecast for the third quarter in half to 2.5 million due to the Cuties controversy. He now estimates Netflix lost 2 million U.S. and Canadian subscribers in the period, compared with the year-ago increase of 613,000, and his previous estimate for a gain of 500,000, arguing that "this region bears the brunt of the Cuties detractors."

However, Cahall also argued that the controversy and elevated churn are "essentially a flash in the pan for Netflix." He assumed that churn increased five times for a single week due to the issue.

Meanwhile, BMO Capital Markets analyst Daniel Salmon in a Wednesday report left his subscriber expectations "largely unchanged and in line with guidance." He predicts a 98,000 gain in domestic subscribers, while mentioning the Wall Street consensus stood at a loss of 66,000. But he is less optimistic than some peers on the international front where he expects only 2.38 million subscriber adds.

Cowen analyst John Blackledge is more bullish on the third-quarter subscriber front. "We expect paid net adds to come in above guide, underpinned by elevated engagement due to COVID," he wrote in a Wednesday report. "With many consumers continuing to stay home as social activities remain limited, Netflix engagement has likely remained high; meanwhile, the company offered a relatively conservative third-quarter guide in our view."

Blackledge estimated that Netflix added 230,000 net subscribers in the third quarter in the U.S. and Canada and nearly 3.62 million globally.

Even more optimistic is J.P. Morgan's Doug Anmuth, who recently raised his projection for quarterly net subscriber adds from 3.1 million to 5.1 million due to "stronger content and stabilizing download and daily active user trends in September." He highlighted a 300,000 difference between his new estimate and data suggesting 5.4 million subscriber growth, explaining that this "reflects a small degree of elevated churn related to Cuties, but we do not expect a material impact."

The analyst team at Evercore ISI is particularly bullish on Netflix's subscriber trends, forecasting third-quarter net additions of around 7 million, "well above guidance."

But it expects more conservative commentary from management about the final quarter of the year. "For the fourth quarter, the Street is looking for around 6 million net adds, down 35 percent year-over-year," the Evercore ISI analysts wrote in a report. "Whether this is conservative enough is tough to say. However, a fourth-quarter guidance blowout seems unlikely from where we sit today as churn has likely picked up into the end of the quarter as economies opened up, and Netflix dealt with the Cuties controversy. Additionally, despite spiking caseloads in Europe, download activity in the region has not moved higher in conjunction. Thus, we’d expect the company to once again take a conservative tact towards its forward outlook."

One topic analysts are also keeping eyes and ears out for during Netflix's earnings conference are signs of possible future price increases. After all, the streaming giant has said it would end free trials in the U.S. and recently unveiled a price increase in Canada "that drove questions on the next potential U.S. price increase," said Salmon. "We remain at plus $1 for all tiers in the third quarter of 2021."

Blackledge pointed out that Netflix last raised its U.S. prices starting in early 2019, concluding: "Increased pricing power leaves the company well positioned to raise as we head into 2021 and beyond, notwithstanding recent price increases in Canada and Mexico, among other markets."