Netflix (NFLX) Tops Paid Subs and Revenue Estimates But Misses on EPS, Q2 Seen as 'Largely Uneventful Quarter'

July 21, 2021 7:31 AM EDT
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Netflix (NASDAQ: NFLX) reported mostly better-than-expected Q2 earnings with earnings per share coming in at $2.97 per share to miss on $3.16 per share expected from market analysts.

Revenue for the quarter came in at $7.34 billion, slightly better than the $7.32 billion expected. Net paid subs were reported at 1.54 million to easily exceed the 1 million the company expected.

“In Q2, revenue increased 19% year over year to $7.3 billion, while operating income rose 36% year over year to $1.8 billion. We finished the quarter with over 209m paid memberships, slightly ahead of our forecast. COVID has created some lumpiness in our membership growth (higher growth in 2020, slower growth this year), which is working its way through. We continue to focus on improving our service for our members and bringing them the best stories from around the world,” the company said in a statement.

As far as the guidance is expected, the company is projecting 3.5 million net adds for Q3 to miss on the analysts’ expectations of 5.46 million. NFLX said it has spent $8 billion in cash on content and expects this number to increase to $12 billion.

The company sees Q3 revenue of $7.477 billion and EPS of $2.55, versus the consensus of $7.48 billion and $2.17.

“If we achieve our forecast, we will have added more than 54m paid net adds over the past 24 months or 27m on an annualized basis over that time period, which is consistent with our pre-COVID annual rate of net additions,” the company added.

As expected, Netflix also confirmed it is entering the gaming market and sees this sector as a “new content category.” The company will initially focus on mobile video games.

“We’re excited as ever about our movies and TV series offering and we expect a long runway of increasing investment and growth across all of our existing content categories, but since we are nearly a decade into our push into original programming, we think the time is right to learn more about how our members value games,” the company stressed.

BofA analyst Nat Schindler described Q2 as “largely uneventful quarter” as a key investor question remained unanswered: Can Netflix continue to grow subscribers by more than 25mn/yr as they did in ’18 and ’19 before the pandemic?

“We continue to believe neither the pandemic nor competition fundamentally altered Netflix’s trajectory and see subscriber additions in’20 and ’21 combined to be roughly on par with ’18 and ’19. Unfortunately, neither the 2Q results nor the 3Q guidance gives us much new to go on and we may have to wait until 4Q when key pandemic-delayed content will launch to really know. We continue to see a long runway for Netflix to increase their market share from linear TV, and we believe that they are in a strong position to continue to raises prices as their engagement continues to increase. Our FY21 Rev/Net sub adds estimates go to $29.7bn/17mn from $29.6bn/19mn to reflect lower subscriber acquisitions in 3Q due to a light content slate and higher ARPU growth,” the analyst said in a memo.

For Stifel analyst Scott Devitt, the long-term story remains unchanged. He reiterated a “Buy” rating and raised his price target to $580.00 per share, from $56.00 prior.

“We believe Netflix's business has become fairly predictable as it has matured. In coming quarters, we expect Netflix to prove that it continues to be on a ~25mm annual subscriber addition run rate. We expect global subs to rise from 223mm in 2021 to 346mm by 2026. We expect revenue to rise from $30B in 2021 to $61B by 2026. We expect operating income to rise from $6B in 2021 to $21B by 2026. In 2025, we believe Netflix can trade for 25x forward operating income/35x forward earnings for a globally dominant media technology company. If our base case assessment proves accurate, Netflix shares would double over the next four years. In our view, now would be a good time to accumulate shares prior to evidence showing up later this year that the company remains on track to meet our longer-term projections,” Devitt said in a memo sent to clients.

Shares of the company are down 0.4% in pre-open Wednesday.

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