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Netflix Stock Slides After Q3 Earnings Beat; Squid Game Success Powers Subscriber Growth

Squid Game's astonishing success helped lift Asia-Pacific subscriber growth for Netflix and power a solid earnings beat for the streaming service benchmark.

Netflix  (NFLX) - Get Free Report shares moved lower in pre-market trading after the streaming entertainment service blasted Wall Street forecasts for its third quarter earnings and and subscriber growth thanks in part to hit shows such as Squid Game and Bridgerton.

Netflix said earnings for the September quarter rose 83.3% from last year to $3.19 per share, while revenues jumped 16% to 7.5 billion. Around 4.4 million people signed on to Netflix over the quarter, the company said, taking its overall total to a record high 213.6 million.

Netflix said 142 million households have watched Squid Game, the violent Korean-made dystopian drama series, a "mind boggling" total that the group says will spark subscriber growth of around 8.5 million -- topping Street forecasts -- over the final months of the year.

"If you think about the big picture, we're at 200-and-something million. That's pretty small compared to pay-TV households, ex China. So just matching the pay-TV households, plenty of room for growth," CEO Reed Hastings told investors on a conference call late Tuesday. "Streaming is developing, you know, at a great pace, all kinds of devices and competitors helping that market growing."

"Competition, obviously, that's a factor, but the amount of scale of content and entertainment that we have, and the way we're set up -- it's like Squid Game is incredible," he added. "And so there's got to be other amazing ones like that, that even I don't yet know about that are digesting in the Netflix content engine."

Netflix shares, which have gained around 22% so far this year, were marked 1.75% lower in early trading to change hands at $627.90 each. 

The impressive growth numbers, however, masked disappointing additions in North America, with around half of the 4.4 million subs brought in over the quarter coming from the Asia-Pacific market, where prices are lower and margins and thinner. Partly as a result of that, free cash flow for the quarter came in at -$106 million, although the group repeated its plan to be cash flow positive by the end of next year.

"We believe Netflix's massive hyperlocal production operations (local TV/film in 45 countries) combined with the ability to distribute content globally is creating a wider moat that, in our view, should allow it to replicate more Squid Game-type sensations over the next decade," said Oppenheimer analyst Jed Kelly, who boosted his price target by $130, to $750 per share, following last night's earnings beat. He also carries an 'outperform' rating on the stock.

"Management indicated that 142 million households (67% of subscribers) watched the series in its first four weeks," he added. Additionally, we see NFLX's underlying pricing power coming into focus on strong retention trends into accelerating production rollouts, which will be critical to maintaining solid top-line growth in the UCAN region."