Netflix Analysts Break Down Q3 Earnings: 'Solid Recovery With Large Content Launches Ahead'

Netflix Inc NFLX shares traded lower Wednesday after the company reported a third-quarter earnings beat.

Netflix reported third-quarter adjusted EPS of $3.19, beating consensus analyst estimates of $2.56. Third-quarter revenue was $7.48 billion, up 16.3% from a year ago and in-line with analyst estimates.

Netflix also reported 4.4 million net new paid subscribers, well ahead of Wall Street expectations of 3.84 million subscribers. That number was likely boosted by the company’s hit Korean drama “Squid Game,” which Netflix said was viewed by 142 million member households in the first four weeks following its release.

Looking ahead, Netflix guided for 8.5 million subscriber additions in the fourth quarter. It's also expecting Q4 revenue of $7.7 billion and profits of 80 cents per share. The company also said it expects to be break-even on cash flow for the full year in 2021 and cash flow positive starting in 2022.

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Bullish 2022 Outlook: Morgan Stanley analyst Benjamin Swinburne said the impressive third-quarter numbers give him increased confidence in his bullish outlook for another strong year of growth in 2022.

“The strong 4Q guidance builds off a better than expected 3Q and reinforces the investment case for NFLX shares as it begins to exit the COVID related impacts to the business over the past 18 months,” Swinburne wrote in a note.

Truist analyst Matthew Thornton said original content, gaming upside and share buybacks should continue to support the stock.

“We remain constructive given the strong content path, nascent gaming narrative, and buybacks, with our long-term thesis unchanged (durable/predictable/growing core with optionality),” Thornton wrote.

Rosenblatt Securities analyst Mark Zgutowicz estimates “Squid Games” alone contributed about 900,000 net subscriber additions in the third quarter.

“And while some may argue 4Q’s 8.5M net add guide could see a modest beat, the fact that management did not guide higher – despite a mammoth 142M views of Squid Game, +75% above its prior all-time leading title Bridgerton– suggests to us a lack of confidence in meeting/exceeding the present 2022 bar,” Zgutowicz wrote.

Impressive Content Slate: Bank of America analyst Nat Schindler said Netflix’s numbers represented a “solid recovery with large content launches ahead.”

“We continue to see a long runway for Netflix to increase its market share from linear TV, and we believe that it is in a strong position to continue raising prices as its engagement continues to increase,” Schindler wrote.

KeyBanc analyst Justin Patterson said Netflix’s fourth-quarter content slate is unprecedented.

“Given momentum entering the quarter and Netflix's unprecedented 4Q slate (e.g., Money Heist Part 2, The Witcher, major films, etc.), we believe there is an upward bias to estimates, particularly as APAC ramps,” Patterson wrote.

BMO Capital Markets analyst Daniel Salmon said “Squid Game” is just the beginning of a strong upcoming content slate for Netflix heading into 2022.

“We think more dynamic monetization of NFLX growing owned content assets like selective licensing to ad-supported streaming services could create a leg higher from our current view,” Salmon wrote.

Premium Valuation: Raymond James analyst Andrew Marok said subscriber guidance for the fourth quarter and 2022 was mostly in-line with expectations, but Netflix shares are appropriately valued at around 9 times 2022 sales.

“The solid 4Q guide goes some way toward easing concerns around the sustainability of demand trends, and a more balanced content pipeline in 2022 should usher in somewhat of a return to normal,” Marok wrote.

Wells Fargo analyst Steven Cahall said Netflix shares are expensive, but the company’s ability to consistently grow earnings and add subscribers makes the stock worthy of a premium valuation.

“We think valuation is the wrong thing to focus on, while quality and sustainability of growth is the right thing and the result of compelling customer acquisition and retention efforts,” Cahall wrote.

Needham analyst Laura Martin said Netflix needs to add an add-supported, lower-priced subscription tier to expand its total addressable market and stave off lower-priced competitors.

“Without a lower cost tier, we believe churn will rise in NFLX's highest ARPU markets owing to the ‘digital attention recession’ as global economies continue to reopen over the next 12 months,” Martin wrote.

Ratings And Price Targets:

• Morgan Stanley has an Overweight rating and $700 target.
• Bank of America has a Buy rating and $750 target.
• Raymond James has a Market Perform rating.
• BMO Capital Markets has an Outperform rating and $700 target.
• Rosenblatt Securities has a Neutral rating and $450 target.
• Wells Fargo has an Overweight rating and $800 target.
• Truist has a Buy rating and $690 target.
• Needham has an Underperform rating.
• KeyBanc has an Overweight rating and $690 target.

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