Netflix will report its second-quarter results Wednesday during a period of dramatic change in the streaming sector, as bulls and bears marshal evidence for their contrasting views of the company’s future.
Believers in the long-term viability of Netflix point to its global footprint and programming juggernaut, with stellar (albeit self-reported) viewership for multiple Emmy nominee When They See Us and the film Murder Mystery. Stranger Things 3 also set viewership records this month, according to Netflix, which will boost third-quarter results.
Skeptics point to its negative free cash flow (which is expected to hit $3.5 billion by year-end) as well as net debt of $10.3 billion, plus content spending that has hit $15 billion a year. Bears also note that Disney, WarnerMedia and NBCUniversal are all preparing to launch direct-to-consumer services and have taken back rights to major titles such as Friends and The Office. Michael Pachter of Wedbush Securities (long a Netflix-knocker) estimates that programs owned by Comcast, Disney (which just acquired most of 21st Century Fox) and WarnerMedia account for 65% of total viewing time on Netflix.
Still, overall Netflix sentiment on Wall Street remains largely upbeat as it approaches the 10th anniversary of its first stream. Look no further than the company’s share price, which was at $366.55 a share in Tuesday afternoon trading. It has held steady in recent months despite a drumbeat of news about Disney+ undercutting it on price, Apple gearing up to launch Apple TV+, and several heavily watched shows leaving the platform.
“The stock has been trading sideways the past four months (and is at Oct ’18 levels), likely on anticipation of upcoming competitive services from Disney, Apple, etc.,” wrote Cowen & Co. analyst John Blackledge. “We think these fears are overdone.” In a recent note to clients, Blackledge reaffirmed his “outperform” rating on the stock, with a 12-month price target of $455.
The consensus prediction by Wall Street analysts is for Netflix to add about 5 million new subscribers, reaching about 155 million worldwide. Revenue is projected to increase 26% from a year ago to $4.9 billion, with earnings per share coming in at 56 cents a share, down 34% from the year-earlier period but ahead of management’s guidance of 55 cents.
Ben Swinburne of Morgan Stanley reaffirmed his “overweight” (buy) rating on Netflix stock in a note to clients on Tuesday. As to the risk of content owners clawing back their licensed fare, Swinburne notes that it is largely a U.S. phenomenon, which means it has an effect on just 15% of the paid net subscribers he expectd Netflix to add in 2020 and 2021. He also says the company long ago began pivoting to original programming, while also retaining access to “significant third-party IP,” including the current slate from the CW. Plus, the analyst adds, major studios like Sony and Paramount have recognized that they are better off profiting from being a supplier to Netflix rather than a competitor.
After Netflix’s day, three weeks of earnings reports will follow, with questions sure to greet virtually every management team about — what else — their outlook on streaming and how they plan to catch up to Netflix.