Netflix Analysts Confident Of Fundamentals, Long-Term Outperformance Ahead Of Q3 Results

Netflix Inc NFLX shares are a bit off from their 2020 high of $575.37, although the stock is still up almost 70% year to date. The recent lukewarm performance has come amid concerns about competition and slowing subscriber growth.

Investors are keyed-in to the streaming giant's third-quarter results, due Oct. 20, to get clarity on where the stock is headed in the near to medium term.

Q3 Expectations: Analysts, on average, estimate earnings of $2.13 per share on revenues of $6.38 billion. This compares to the year-ago EPS of $1.47 and revenues of $5.24 billion.

KeyBanc Capital Markets analyst Justin Patterson estimates Netflix may have earned $2.16 per share on revenues of $6.36 billion.

Net Adds Could Still Beat: KFL, worldwide search queries, and app store ranks all decelerated from highs seen in the second quarter, Patterson said. The decelerations, however, are not overly negative relative to the company's net add guidance of 2.5 million.

The analyst estimates net adds of 2.8 million for the third quarter and 6 million for the fourth quarter.

Jefferies analyst Alex Giaimo said COVID is still a net positive for Netflix usage. Netflix is seeing softening trends in app usage, but lower usage does not perfectly correlate with subscriber trends.

Patterson said the "Cancel Netflix" trend due to user backlash over the "Cuties" movie, though having had some impact, affected fundamentals only modestly. Trends reverted to normalcy thereafter.

Related Link: 7 Worrisome Metrics That Underscore Risks To Netflix's Q3 Results

KeyBanc Is More Confident About Netflix: The pricing cadence is back to normal.

"As Netflix drives more engagement that supports pricing power, we continue to expect at least a $1/mo U.S. price increase in spring/summer of 2021," Patterson wrote in the note.

The firm also highlighted Netflix's favorable competitive positioning and content catalysts.

"While Netflix may resume its historic conservative guidance, we believe investors will look to content launches (e.g., Over the Moon) as upside drivers and audience creation abilities (e.g., Cobra Kai) as upside drivers," Patterson said.

While noting Walt Disney Co's DIS recent re-organization highlighted the challenges media companies face in the current landscape, the analyst said Netflix's combination of content and distribution matters.

Jeffries noted investors are incrementally more bullish on a near-term price hike after the Canadian price hike.

NFLX Stock: Patterson reiterated an Overweight rating on Netflix and increased the price target from $590 to $634. Giaimo has a Buy rating and $570 price target, with the bull-case price target at $700.

The setup into third-quarter earnings is a bit challenging due to the 14% gains of the stock over the last month, Giaimo said.

"While the stock has traded down 8 of the last 12 prints, we recommend a buy-the-dip strategy given sustained fundamentals and NFLX history of long-term out-performance," the analyst wrote in the note. Near-term price hikes will be the next catalyst.

Netflix traded around $541.94 at publication time.