Netflix earnings: No more ‘Friends,’ but plenty of new enemies are on the way
It’s the calm before the competitive storm when streaming video giant Netflix Inc. is scheduled to report second-quarter financial results Wednesday after the market’s close.
For now, Netflix is the acknowledged market leader in streaming with more than 150 million members worldwide. Its stock NFLX, -1.58% is up about 40% this year at $373 per share, compared to a gain of about 19% for the broader S&P 500. And its blockbuster show, “Stranger Things,” just started its third season.
But it can’t get too comfortable. Netflix faces substantially steeper competition in the U.S. later this year from some of the biggest content brands. Apple Inc. AAPL, +0.73% and Walt Disney Co. DIS, +0.50% plan to launch subscription services in 2019. AT&T Inc. T, +0.27% subsidiary WarnerMedia, and Comcast Corp.’s CMCSA, +0.49% NBCUniversal are expected to follow in 2020.
Netflix pooh-poohs any notions it faces a daunting gauntlet of would-be rivals. In recent months, the company has changed its definition of competitors.
“We compete with (and lose to) Fortnite more than HBO,” the company said in its letter to shareholders for the holiday quarter. Netflix’s focus “is not on Disney+, Amazon or others, but on how we can improve our experience for our members.”
It’s a mindset that analysts find hard to believe.
“As invincible as Netflix may seem to be, it ain’t,” Peter Csathy, founder of CREATV Media, said in a newsletter this year. “Disney, Apple and WarnerMedia SVODs [subscription video on demand] are coming later this year — joining Amazon and a host of others that are already hellbent on taking Netflix down a notch … or several. So, this year Netflix will be challenged like never before. And, investors will feel it.”
Disney could pose the biggest threat. Its forthcoming service, Disney+, christened a “Netflix killer,” boasts some of the most popular and valuable content in the entertainment world. At $7 per month, or about half the cost of Netflix’s standard plan, it is a tempting alternative. UBS Securities last month calculated about 43% of U.S. survey respondents are interested in subscribing to Disney+. Another study, from research company Streaming Observer and Mindnet Analytics in late April, estimated 14% of Netflix subscribers would consider dropping the streaming service in favor of Disney+.
Deepening investors’ concerns is the possibility that Disney, Warner Bros., and Comcast withdraw their content from Netflix and not renew licensing deals, which would deprive Netflix of nearly 20% of its total content library in terms of programming hours, according to data from Ampere Analysis. Netflix already faces the loss of two sitcom libraries that have proven to be favorites of their audience.
“The Office” closes when Netflix’s deal with Comcast’s NBCUniversal expires at the end of 2020. NBCUniversal’s forthcoming direct-to-consumer platform will be the exclusive streaming home for the comedy, starting in 2021. Netflix’s $100 million deal to keep “Friends” exclusively on its platform ends at the end of this year, and WarnerMedia’s HBO Max will start airing all the show’s episodes in spring 2020.
This could force Netflix to replace that programming vacuum with pricey content. The Los Gatos, Calif.-based company spent $12.04 billion on content last year, up 35% from $8.9 billion in 2017, according to its fourth-quarter 2018 earnings report. In 2019, Wall Street analysts expect that figure to climb to $15 billion. Cowen analyst John Blackledge says a 52% increase in original programming year-over-year will serve as a “tailwind” for solid Q2 results. (He maintains an Outperform rating and price target of $455.)
“The loss of ‘Friends’ and ‘The Office’ is not all bad as the company can redeploy spending on originals, potentially slowing budget growth,” Bank of America Merrill Lynch analyst Nat Schindler said in a July 12 note, in which he maintained a Buy rating and price target of $450.
Nonetheless, analysts such as Guggenheim’s Michael Morris remain sold on Netflix’s earnings’ trajectory.
“Though larger competitors are aiming to aggregate in-house programming, we believe globally-scaled new, exclusive content differentiates Netflix from entertainment alternatives including legacy (i.e., Turner, Warner, and Disney) and early-stage (PlutoTV and Apple TV+) competitors leveraging library content,” Morris said in a July 8 note, maintaining a Buy rating and price target of $420.
Earnings: Of the 37 analysts surveyed by FactSet, Netflix on average is expected to post adjusted earnings of 56 cents a share, up from the 55 cents a share expected at the beginning of the quarter.
Estimize, which crowdsources estimates from buy and sell-side analysts, fund managers, academics and others, is forecasting EPS of 63 cents, based on 190 estimates.
Revenue: Wall Street expects revenue of $4.9 billion from Netflix, according to 34 analysts polled by FactSet. Analysts are looking for global paid streaming subscriber additions of 5.1 million, according to FactSet, on domestic additions of 350,000 and international additions of 4.8 million. Netflix reported revenue of $3.9 billion during last year’s second quarter, leading to diluted earnings of 85 cents per share, and 5.45 million new paid streaming subscribers.
Estimize is also forecasting revenue of $4.9 billion.
Of the 40 analysts who cover Netflix, 29 have buy or overweight ratings, 9 have hold ratings, and 2 have a sell rating, with an average price target of $412.42, according to FactSet data.
Stock movement: Netflix shares are up about 40% this year through Thursday’s close at $379.50 per share, compared to a gain of about 20% for the broader S&P 500 SPX, +0.29% Netflix stock is down 6% over the last 12 months.
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