NFLX with Nobias technology: Is Netflix a Buy After its Third Quarter Earnings?
Netflix (NFLX) has long held the dominant position in the streaming wars. This has allowed the stock to post fantastic returns over the long-term. Simply put, Netflix is one of the top performing stocks in the entire market over the last decade, with 10-year total returns north of 3,800%. However, in recent quarters, there have been concerns about whether or not the stock is going to continue to generate alpha like this. Netflix is no longer the only show in town as far as streaming services go. Other streaming platforms, such as Disney+, have seen faster subscriber growth than Netflix in the recent past. And, it’s unclear as to whether or not the massive capital expenditures that the company is dedicating towards content is going to result in attractive returns on investment. On top of all of this uncertainty, NFLX shares continue to trade with a high growth premium attached (Netflix shares are trading for approximately 62x 2021 earnings-per-share estimates), intensifying the risk associated with shares.
And yet, with all of this in mind, NFLX is up nearly 14% during the past month and the company just posted third quarter earnings which beat Wall Street’s expectations on both the top and bottom lines. Because of the recent rally, we wanted to see what the credible authors tracked by the Nobias algorithm have had to say about the company recently to see if this momentum is built to last.
Jessica Bursztynsky, a Nobias 4-star rated analyst, covered NFLX’s Q3 earnings report at CNBC.com. She noted that the company generated earnings-per-share of $3.19 versus the consensus of $2.56, “according to Refinitiv survey of analysts”. Bursztynsky highlighted Netflix’s top-line results as well, saying that the company posted quarterly revenue of $7.48 billion which was in-line with the Refinitiv consensus of $7.48 billion. Most importantly, she reported on Netflix’s subscriber numbers, writing, “The quarter’s subscriber growth of 4.4 million was a solid beat over the expected 3.84 million.” Management was bullish on its current content slate, harping on the success of the recently released “Squid Game” show.
Bursztynsky wrote, “Netflix said the South Korean dystopian series has become its “biggest TV show ever.” The company said 142 million member households globally watched the show in its first four weeks.” But, Netflix management appears to be even more excited about the fourth quarter. Bursztynsky touched upon NFLX’s forward guidance, saying, “The company said it expects to add 8.5 million subscribers in the fourth quarter.” She went on to quote Netflix’s co-CEO, Reed Hoffman, who said, ““We’re in uncharted territory. We have so much content coming in Q4 like we’ve never had, so we’ll have to feel our way through and it rolls into a great next year also.”
Lastly, Bursztynsky noted, Netflix is continuing to work towards adding gaming to its subscription service, although she notes, the company says that “it remains very early days for this initiative.” As Netflix’s video sub growth matures (especially in the United States) gaming appears to be a new growth market. Bursztynsky said, “Netflix still wants to grab more users’ attention, competing against activities like watching TikTok, playing Fortnite or reading.” She noted that during the quarterly report, NFLX management said “that when Facebook experienced a global outage earlier this month, Netflix saw engagement increase 14% during that same time period.”
Gaming adds another avenue that its subscribers can take advantage of in terms of entertainment. It’s clear at this point that the ultimate winner of the streaming wars will be the platform with the most eyeballs attached and between its upcoming content slate and new initiatives to expand its existing user base, it appears that Netflix is still looking to innovate.
Neil Patel, a Nobias 5-star rated author, recently published an article highlighting the importance of scale in the streaming race, noting that Netflix’s first mover advantage in the space has created a significant moat for the company because of its ability to outspend peers.
Patel said NFLX’s high subscriber count (and the cash flows that they generate) affords “Netflix the ability to pay $17 billion in cash on content in 2021 alone, which is far greater than other streaming companies. For a smaller competitor with fewer subscribers and a lower content budget, this just wouldn't make much financial sense.”
Patel continued to highlight this bullish thesis saying, “Netflix can outspend rivals and bid on the best content, including top writers and producers, to keep its business flywheel accelerating. Gaining more members equals more revenue, which translates to higher cash outlays for compelling content. This in turn will attract more subscribers in a virtuous cycle.” He concluded, “These favorable characteristics bode well for the business and will propel it further over the next decade.”
And, in terms of expanding its content offerings into the gaming space, Gerelyn Terzo, a Nobias 5-star rated author, recently published an article at Yahoo Finance which discusses the company’s latest moves in that area of the content arena. Terzo said, “Netflix has scooped up Night School Studio, a Los Angeles-based independent game developer behind titles such as Oxenfree. Night School Studio’s games can be accessed on platforms such as PlayStation, Xbox, the Switch and Steam. Netflix also expanded into mobile gaming with the addition of a handful of titles.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
However, he notes, this move is not overly significant and likely represents a small step towards a much larger goal. Terzo believes that for NFLX to make a significant splash in the gaming space, the company is going to have to make a $1b+ acquisition to immediately acquire the attractive intellectual property and programmers/developers that it will need to sustain gaming offerings over the long-term. He wrote, “Wedbush analyst Michael Pachter said on CNBC that Hastings’ company would probably need to make a multi-billion dollar gaming acquisition in order to move the meter, such as Warner Brothers Interactive Entertainment, which is likely on the block.”
Only time will tell whether or not gaming will become a major part of NFLX’s content slate; however, the fact is, it wasn’t all that long ago that Netflix was a company shipping DVD’s to paying customers...if any company can quickly pivot and expand upon their business model, it’s likely this one. Overall, even after the stock’s recent rally, the majority of the credible authors that we track with the Nobias algorithm maintain a bullish sentiment on NFLX shares.
Right now, 87% of the credible authors that we follow express a “Bullish” outlook on the stock. The average price target for NFLX amongst the 4 and 5-star rated Wall Street analysts that we track is currently $672.79. Netflix closed the trading session on Friday at $664.78, which means that this average price target represents upside potential of 1.2%.
In other words, the ~14% rally that we’ve seen play out during the last 30 days has eliminated a lot of the stock’s margin of safety; however, over the long-term, it appears that the credible authors that we track continue to believe in this company’s growth prospects.
Disclosure: Nicholas Ward has no NFLX position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.