ii view: Netflix adds another 10 million customers

Its shares are up over 60% in 2020, but is Covid-19 pulling customer demand forward?

Second-quarter results to 30 June

• Revenue up 24.9% from Q2 2019 to $6.15 billion
• Global net paid additions up 10.1 million from the last quarter
• Paid net subscriber adds up 27.3% from Q2 2019 to 192.95 million 
• Earnings per share up 165% to $1.59

Guidance:

• For Q3 2020, expects global paid net subscriber adds of 2.5 million vs 10.1 million in Q2 2020
• Expects Q3 earnings per share of $2.09

ii round-up:

Global streaming provider Netflix (NASDAQ:NFLX) forecast a bigger slowdown in next or third quarter customer growth than analysts had been predicting. 

Customer growth or paid net global additions of 10.1 million and 15.77 million in the second and first quarters respectively, aided by population lockdowns under the coronavirus, is expected to slow to 2.5 million in the current July to September third quarter. Analysts had pencilled in a figure nearer to 5 million.

Netflix shares fell by more than 9% in after-hours US trading having risen by more than 60% year-to-date. Shares for rival streamer, Walt Disney (NYSE:DIS), are down by more than 15% in 2020. Several of its theme parks have only recently reopened following closures due to the pandemic.  

Netflix also named 20-year veteran and current head of content Ted Sarandos as joint chief executive. Mr Sarandos has worked closely with co-founder and existing CEO Reed Hastings for many years.

Total new paid customer memberships over the first half of 26 million nearly totalled the 28 million added by the streamer over the whole of 2019. Total global customers now number more than 190 million. 

But Netflix had previously warned of what was likely to be a temporary surge in new customers, given population lockdowns and the cancellation of sporting events. 

In the prior first quarter, it forecast 7.5 million new customer adds in Q2, a prediction short of the actual 10.1 million now reported. 

Netflix continues to expect second-half customer adds to be down year-over-year as the strong first half likely pulls through some demand from the second part of the year. 

Group profit margin rose from 14.3% a year ago to 22.1%, due to both customer and revenue growth combined with lower content and marketing spend due to the pandemic. A restart of programme production has begun in many parts of the world.  

It ended the second quarter with more than $7 billion in cash and cash equivalents held. 

ii view:

In a relatively short time, Netflix has become a household name. The ability to stream and watch drama series or movies at a time convenient to the consumer holds great appeal. The company's expansion overseas has been rapid. Revenues in 2019 were split almost evenly between North America and overseas.  

These latest results have again seen Netflix prove a beneficiary of Covid-19. But whether a pull through of customers from the second half has been caused by the pandemic, as management suspects, only time will tell. Competition also continues to grow. Along with existing services from Amazon (NASDAQ:AMZN) and Hulu, Walt Disney, Apple (NASDAQ:AAPL) and ITV (LSE:ITV) and the BBC have all recently launched their own streaming services. 

For investors, a one-year prospective price/earnings (PE) ratio of around 80 against a three-year average of over 120, suggests the removal of some early investor enthusiasm. Although not directly comparable, Amazon, and another considered winner in the Covid environment for both its online retail and Prime stream services, sits on a one-year prospective PE ratio of over 140.

Despite increased competition, Netflix continues to embrace the new entrants, believing it is a sign of growth in on-demand viewing as opposed to historical linear viewing.  It also remains confidence that the quality of its content is high and regularly better than the opposition’s. There is certainly room for further weakness in the share price, given the stock has been 'priced for perfection', so investors will tread carefully. However, in terms of sentiment,and with a view to long-term performance, Netflix has appeal at the right price.

Positives: 

• Revenues and paid memberships still rising
• Heavy investment made in building a leadership position

Negatives:

• Growing competition from Disney, Apple and others
• Suffering content production disruption due to Covid-19

The average rating of stock market analysts:

Buy