Netflix was a winner of the early months of the COVID pandemic, when many people were stuck at home and bored. But with employees returning to work, the scenario is less favorable for the company's business model.
Let's take a deeper look at what experts are expecting from Netflix's financial results.
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Wall Street's Fourth-Quarter Expectations
For Netflix's fourth quarter, analysts are estimating earnings per share (EPS) of $1.13 and revenue of $7.68 billion. However, according to company guidance, Netflix expects earnings per share of 80 cents and revenue of $7.71 billion.
For the full year, the Wall Street consensus forecasts EPS of $10.50 and $296.6 billion in revenue.
Recently, Credit Suisse analyst Douglas Mitchelson reiterated his optimism on Netflix shares. He assigned NFLX stock a buy rating and a $740 price target. However, he doesn't seem too upbeat about the company in the short term.
According to Mitchelson, investor interest is as low as he has seen it in the past eight years. He also sees a decline in sentiment for net adds over the next two quarters, during a post-pandemic period when Netflix needs to prove the resilience of its business model.
More cautiously, MoffettNathanson analyst Michael Nathanson maintained his neutral rating and lowered his price target to $460 on NFLX due to the high levels of competition the company is seeing thanks to new streaming services like Peacock and Paramount+.
He thinks that Netflix will likely add around 550,000 subscribers in the U.S. and Canada, a decrease from his firm's prior, more aggressive estimate.
What to Watch: User Growth and Operating Costs
Netflix stock is considered a growth stock. Therefore, it has a high valuation multiple (see its price-to-earnings ratio of 45 times). Analysts mainly tend to discuss user growth and operating costs, the main drivers for the company's earnings.
As a major beneficiary of the stay-at-home trends during much of the pandemic period, Netflix experienced a sharp acceleration in its growth between 2020 and 2021. However, naturally, with a higher bar to maintain high growth in a post-pandemic period, the big question is around whether Netflix will be able to return to aggressive growth.
There's also some skepticism about Netflix earnings growth due to its high costs of producing its own content. But Netflix's margins are not that bad, considering a net margin of 17.6%, compared to 11% for its competitor Roku (ROKU) - Get Roku, Inc. Class A Report. This indicates that Netflix's management has been doing a good job.
According to Netflix, it expects to have added 8.5 million paid subscribers for the full fiscal-year 2021. It also expects to have an operating margin of 20% or slightly better. In order to achieve this, the fourth-quarter operating margin should be approximately 6.5%, compared to 14% in the fourth quarter of 2020.
The drop in year-over-year operating margin is due to the backloaded big content release schedule for the fourth quarter. This should result in a roughly 19% year-over-year increase in content amortization.
Original Content in the Fourth Quarter
In the third quarter, Squid Game took the top spot among Netflix's highest-viewed shows to date. And it played an important role in reaching larger audiences.
For the fourth quarter, Netflix's management expects to see the strongest content offering yet. This will show up as bigger content expense and lower operating margins sequentially.
Shows like The Witcher, You, Tiger King, Cobra Kai, La Casa de Papel (aka Money Heist), and Emily In Paris, as well as other new movies featuring big stars like Leonardo DiCaprio (Don't Look Up) and Dwayne Johnson (Red Notice), make up the main original content for the fourth quarter.
With that being the case, with the reopening of production studios post-pandemic, 2022 should have a much larger amount of original content than 2021.
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting MavenFlix)