Netflix surprise puts rocket under share price

Hit hard by fears of competition from America's big media players, Netflix shares are on the up.

Netflix (NASDAQ:NFLX) shares were back on form today after the streaming service gave a timely reminder of its earnings power ahead of competition from the likes of The Walt Disney (NYSE:DIS) and Apple (NASDAQ:AAPL).

The Nasdaq-listed stock opened 8% higher today after third quarter figures came in ahead of Wall Street forecasts last night, reassuring investors after disappointing subscriber growth numbers in its previous quarter. The share price hasn't been this high since mid-August.

Operating income of US$980 million more than doubled year-on-year and was 20% ahead of Morgan Stanley's estimate after strong growth in average revenue per user and margins.

Netflix added 6.8 million paid subscriptions in the period, driven by international viewers after achieving year-on-year growth outside the United States of 23% to 6.3 million. Paid net adds in the US totalled 500,000, which was below forecast.

The overall figure was down on the company's initial seven million forecast but better than the 2.7 million recorded in the second quarter, when the figures triggered a big sell-off for shares.

Source: TradingView Past performance is not a guide to future performance

Stock market sentiment has also been impacted by the potential threat posed by new streaming services, such as Walt Disney's Disney Plus in November, Amazon Prime and Apple TV+.

Netflix said last night that while the newcomers had some great titles, they were unable to compete on "variety, diversity and quality of new original programming".

It told investors: "The launch of these new services will be noisy. There may be some modest headwind to our near-term growth, and we have tried to factor that into our guidance. In the long-term, though, we expect we'll continue to grow nicely given the strength of our service and the large market opportunity." 

Netflix is home to critically acclaimed shows including The Crown and Stranger Things, which has been watched by 64 million member households in the first four weeks of its third season.

The dominant market position helped Netflix shares breach the $400 barrier in summer 2018, before falling back to $263 at the end of last month. Morgan Stanley thinks there's potential for Netflix to reach $400 again, which implies 26 times the bank's 2024 EPS forecast of nearly $21.

They added: "Against a wall of worry, results were better than feared. It is possible net adds have peaked but earnings power has a long way to run."

• US earnings: Markets still banking on some good news
• A healthy outlook for one of the largest companies on earth
• You can buy and sell US shares by clicking here
• Get exposure to the world's biggest companies via these ii Super 60 recommended funds

Netflix's performance is a welcome boost for Wall Street as the third quarter reporting season gets into full swing. Having set the bar increasingly high on company earnings in recent times, consensus expectations on Wall Street are now much more gloomy.

Analysts at UBS, however, think the current projection for a 4.1% drop in earnings per share is too pessimistic. They expect a 2% fall, albeit the first quarterly contraction since 2016.

They said this week: "In our view, 3Q results will be a mixed bag for markets. Earnings growth remains weak and elevated policy uncertainty likely will result in a fairly muted
outlook for many companies in economically-sensitive industries.

"However, investor hopes for the framework of a trade deal between the US and China should limit the downside."