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Netflix Earnings Preview: Here’s What You Need to Know
Stock Analysis & Ideas

Netflix Earnings Preview: Here’s What You Need to Know

Netflix, Inc. (NFLX) is set to release second-quarter 2021 earnings on July 20 after the market closes.

Over the past six months, shares of the company have jumped 10%, trading at over $547.

Given that it’s the world’s largest video streaming company, it is worth taking a look at Netflix’s fundamentals ahead of the results. A strong set of numbers in Q2 could help the stock regain investors’ confidence, so let’s take a closer look at what analysts on the Street are expecting.

Q2 Projections

For Q2, Street expects NFLX to report adjusted EPS of $3.16 and revenues of $7.32 billion.

Meanwhile, the Earnings Whisper number, or the Street’s unofficial view on earnings, stands at $3.24 per share. (See NFLX stock charts on TipRanks)

Netflix has also provided guidance for Q2. The company forecasts revenues of $7.30 billion and earnings of $3.16 per share. The company expects to add 1 million new subscribers worldwide in Q2, down from 10 million raked up in the year-ago quarter.

Prior Quarter Snapshot

In the last-reported first quarter, revenues came in at $7.16 billion, an increase of 24% year-over-year, in line with the company’s guidance. Earnings per share in the quarter more than doubled to $3.75 against $1.57 reported in the year-ago period.

Despite the strong earnings beat, one thing that disappointed investors in Q1 was the lower-than-expected subscriber additions in the quarter. Paid net additions in the quarter totaled 4 million, well below the estimated 6 million.

What to Watch Out for in Netflix Earnings

Investors have largely been betting on the companies poised to benefit from the reopening economy, rather than on companies that have soared during the pandemic.

As the economy recovers from the COVID-19 outage, investors will be monitoring to see whether the streaming video powerhouse can restore subscriber growth after seeing a drop in sign-ups in Q1.

In the Q1 earnings call, Netflix said in a statement that a COVID-19 pull forward last year and a lighter content slate in the first half of 2021 could lead to slower membership growth in Q2. So, without a doubt, Netflix’s subscriber growth numbers in the upcoming quarter will be questionable.

On a brighter note, Netflix has been aggressively expanding its original content library in the increasingly competitive streaming space. Netflix plans to spend more than $17 billion in cash on content this year. The company also plans to launch more originals compared to 2020.

The streaming giant is expected to project a solid second half of the year. The company is betting on the return of new seasons for some of its biggest shows and films to fuel growth. These include Sex Education Season 3, The Witcher Season 2, Stranger Things Season 4, and You Season 3. Original movies slated for release later in the year include The Kissing Booth finale, Red Notice, Don’t Look Up, Robin Robin, Too Hot to Handle, and A Week Away.

Besides for those, the streaming giant recently announced three new animated comedy series — A Tale Dark & Grimm (Fall 2021), Dogs in Space (Fall 2021), and Super Giant Robot Brothers (2022) for kids and families around the world.

It is worth noting that the company is focusing on the value of content and is trying to make its content accessible to as many people as possible.

Markedly, Netflix’s rising popularity in the Asia Pacific (APAC) and Latin America (LATAM), owing to its diverse content offerings in regional languages, is likely to fuel top-line growth in the upcoming quarter.

Another key takeaway from Netflix’s quarterly letter to shareholders in Q1 was the churn. Churn measures the percentage of existing subscribers who leave the service, a crucial metric for Netflix in this competitive streaming space.

To note, churn was down year-over-year, while viewing per household was up year-over-year in Q1, indicating that Netflix’s fundamentals remain intact.

Netflix stated in a press release, “As always, we’re focusing on the fundamentals of our business, which remain healthy….“We are optimistic about the future and believe we are still in the early days of the adoption of internet entertainment, which should provide us with many years of growth ahead.”

Recent Key Developments

Several recent deals should be of interest to Netflix investors. Ahead of the second-quarter earnings announcement, Netflix expanded its deal with Bridgerton producer Shonda Rhimes. Per the terms of the deal, Netflix and Shondaland will produce and distribute feature films, as well as potential gaming, virtual reality, and live content.

In another development, on June 21, Netflix partnered with Amblin Partners, the company headed by Steven Spielberg, to produce multiple new films per year.

Additionally, on June 10, Netflix launched its first owned-and-operated online retail outlet, Netflix.shop. The shop sells products directly to consumers, helping Netflix to establish a foothold in the e-commerce space. At the online shop’s launch, the company debuted a series of anime-inspired souvenirs by three up-and-coming designers, Nathalie Nguyen, Kristopher Kites, and Jordan Bentley. The online store is currently available only in the United States, but it will soon be expanded to other countries.

Also, on June 7, Netflix signed a multi-year first-look contract with Jennifer Lopez and her production company, Nuyorican Productions. The production house will empower diverse female actors, writers, and directors by producing feature films, television series, and unscripted content.

These partnerships and agreements are expected to strengthen its original content offerings of TV series, documentaries, and feature films across various genres and languages through the rest of 2021.

Analysts’ Opinions on Netflix

Ahead of the Q2 earnings release, JPMorgan analyst Doug Anmuth reiterated a Buy rating on the stock with a $600 price target (9.5% upside potential).

Anmuth remains positive about the company’s earnings results going into Q2, stating, “We remain positive on the shares into earnings and 2H21 as we believe NFLX could have its strongest 6-month content slate ever, it gets greater distance from the pandemic pull-forward, & NFLX should make more progress in under-penetrated international markets.”

The analyst now forecasts net additions of around 2 million in Q2, up from 1.6 million previously, thanks to strong content in the second half of June, including Fatherhood, Manifest, and The Ice Road.

Another analyst, Scott Devitt from Stifel Nicolaus, reiterated a Buy rating on the stock with a $560 price target, implying a 2.2% upside potential to current levels.

Devitt expects the results to be in line with the consensus estimate. The analyst is of the opinion that “pandemic-related pull forward in recent quarters and a lighter content slate stemming from production delays last year have resulted in softer expectations for 2Q.”

However, Devitt remains positive about the second half of 2021, stating, “We expect accelerating subscriber additions in 2H:21 supported by a stronger content slate as the company moves past a period of pull-forward digestion and fewer content additions.”

The rest of the Street is cautiously optimistic about the stock with a Moderate Buy consensus rating based on 26 Buys, 7 Holds, and 3 Sells. The average NFLX price target of $606.39 implies 10.7% upside potential from the current levels.

NFLX scores an 8 of 10 from TipRanks’ Smart Score rating system, indicating that the stock has strong potential to outperform market expectations.

Bottom Line on Netflix

As the economy recovers from the pandemic and people return to the outdoors, it will be interesting to see whether Netflix will be able to add enough new subscribers in Q2 to sustain the recent growth rate.

Regardless, there is no denying the fact that Netflix, with its unique and vast offerings, continues to be the leader in the streaming video space. Its growing library of original content and its international expansion strategy make it well-positioned for future growth.

Disclosure: Shalu Saraf held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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