ii view: Netflix new subscribers smash estimates

New content is pushing subscriber growth and an online game offering is being tested. Buy, sell or hold?

Third-quarter results to 30 September

• New quarterly subscribers of 4.4 million giving a total of 213.5 million
• Revenue up 16.3% year-over-year to $7.71 billion
• Earnings per share of $3.19, up 83% year-over-year

Guidance:

• Expects new subscribers of 8.5 million during the fourth quarter

ii round-up:

Global streaming media giant Netflix (NASDAQ:NFLX) reported robust third-quarter results, with a beat in new subscriber numbers appearing to underline a recovery from prior pandemic disruption to content production. 

Aided by its new Korean hit show Squid Game, new quarterly subscriber growth of 4.4 million smashed estimates of nearer to 3.9 million. That puts its total paid subscriber base at 213.5 million, with a further 8.5 million new members expected to be added in the current fourth quarter. Quarterly earnings of $3.19 per share also exceeded analyst forecasts. 

After an initial spike higher in after-hours trade, Netflix shares drifted marginally lower to trade little changed. However, they’re still up 20% since July’s second-quarter results. Shares for rival streamers Disney (NYSE:DIS) and Amazon (NASDAQ:AMZN) are both down around 3% over that time. 

Netflix revenues for the quarter grew by 16% year-over-year to $7.71 billion. It repurchased $100 million of its own shares during the quarter with a slower pace of buybacks reflective of a pick-up in merger and acquisition activity. 

During the period it acquired Night School Studio, a maker of games including Oxenfree. Netflix has begun testing an online game offering in selected countries.

ii view:

Started in 1997, Netflix today streams its TV and movie content to more than 190 countries. Overseas revenues during 2020 overtook those of its home North American market at around 55% of the group’s total. 

For investors, the debate over appropriate valuations continues. A forecast one-year prospective price/earnings (PE) ratio of over 60 compares with estimates of under 20 at Sky TV owner Comcast (NASDAQ:CMCSA), suggesting the shares are not obviously cheap. Competition from the likes of Amazon's (NASDAQ:AMZN) Prime remains intense while, unlike Comcast and Apple (NASDAQ:AAPL), Netflix pays no dividend. 

On the upside, the feast and famine caused by the pandemic now looks to be largely in the rear-view mirror, and subscriber numbers continue to grow. Management has also previously embraced competition from new entrants, believing it is a sign of growth in on-demand viewing as opposed to historical linear viewing. A move to offer sport content could also occur at some point. In all, and given its first-mover advantage, investors will like the odds of further growth over the long term.

Positives: 

• Heavy investment already made in building a leadership position
• Ongoing share buybacks

Negatives:

• Intense competition from Disney, Apple and others
• Valuation not necessarily cheap

The average rating of stock market analysts:

Buy