Why This Netflix Analyst Thinks Recovery Is Off To A Faster Start Than Expected

Netflix Inc NFLX is scheduled to report its third-quarter results on Oct. 19, after the market close. After a lackluster first half, the streaming giant has picked up momentum, according to an analyst at KeyBanc Capital Markets.

The Netflix Analyst: Justin Patterson maintained an Overweight rating on Netflix shares and increased the price target from $645 to $670.

The Netflix Thesis: Netflix's recovery in the second half appears to have gone off faster-than-expected, thanks to the surprise success of "Squid Game," Patterson said in a note.

Global search queries rose 9% year-over-year in the third quarter, and "Squid Game" searches have surpassed "Stranger Things," the analyst noted. Netflix iOS app was ranked as the top 10 entertainment app in over 170 countries, he added.

International, the analyst said, is leading the recovery, and the U.S. and Canada, or UCAN, is lagging, although no worse than the consensus estimate of 200,000 paid net adds.

Netflix's share of industry paid net adds is likely to increase, given Walt Disney Co.'s DIS guidance for softness in the calendar year third quarter and difficult comps faced by competitors following launches, Patterson said.

Related Link: Walmart, Netflix Partner On Merchandise From Hit Shows Like 'Squid Game,' 'Nailed It'

Among factors to watch in the third-quarter earnings release are Netflix's regional performance and operating margin commentary, the analyst said.

"While UCAN is expected to remain soft, we believe international strength can return Netflix to a cadence of 25M-28M annual paid net adds in 2022E and beyond," the analyst said.

Consensus is already factoring in less than 300 basis point improvement in operating margin for 2022, Patterson noted. On a positive note, if the investment is even steeper in content and marketing, there is a higher probability of subscriber upside, he said.

KeyBanc estimates 11.6 million paid net adds in the second half, up from the 10.8 million estimate previously. Accordingly, the revenue estimate for 2021 and 2022 increases by 0.1% and 0.3%, respectively, the firm said.

Due to the slightly higher revenue base and KeyBanc's view of competitive durability warrants a slightly higher multiple, it nudged up its price target for Netflix shares.

NFLX Price Action: At last check Monday, Netflix shares were up 0.16% at $633.65.

Image by Souvik Banerjee from Pixabay