What Will Netflix Bet On Beyond Subscriptions?

BY GEORG SZALAI | HollywoodReporter.Com

Troy Warren for CNT

Ahead of its July 20 earnings, the streaming giant has signaled moves into video games, events and merchandise.

It won’t just be all about subscribers and financials in Netflix’s quarterly earnings report and call on Tuesday, July 20.

Wall Street and Hollywood will also be closely watching for management to potentially provide commentary, or at least a signal, on a direction on any new business initiatives, such as unveiled steps into video games and merchandise.

Since June, Netflix has opened an online store — where it sells items based on properties like Stranger Things, The Witcher and Bridgerton — hired an executive, Mike Verdu, formerly of Facebook and Electronic Arts, to explore opportunities in video games and inked an expansion of mega-producer Shonda Rhimes’ deal that will include films, virtual reality content and gaming.

The “initial reaction of the financial markets has been positive,” Bernstein analyst Todd Juenger wrote in a July 15 report of Netflix’s gaming hire, but added: “There are dozens of different ways Netflix could pursue video games.”

Juenger mentioned that some investors were wondering if “knowing second-quarter results and the third-quarter guide will be received as weak, Netflix leaked this story now in order to change the narrative, distract, divert attention from the core business.” But the analyst offered: “In our strong view, Netflix management has never behaved in a way where they would be expected to engage in such short-term diversions to try and impact/protect the stock price.”

In terms of Netflix’s latest subscriber update, management, led by co-CEOs Reed Hastings and Ted Sarandos, has set a low bar of just 1 million new members in the second quarter that ended June 30 after nearly 4 million net additions in the first quarter, below expectations. That would compare to the 10 million subscribers gained in the coronavirus pandemic-fueled second quarter of 2020.

Wedbush analyst Michael Pachter reiterated his “underperform” rating and $342 price target on Netflix’s stock on Thursday. He forecasts no change to the streamer’s subscriber base in the U.S. and Canada, but growth of 1 million in international markets, “in line with guidance, but below consensus of 1.97 million.”

Pachter argued: “Netflix has a considerable first-mover advantage, with nearly 210 million global subscribers. This figure, however, belies the fact that Netflix is approaching market saturation in North America, with its nearly 75 million members comprising around 60 percent of all households.”

UBS analyst John Hodulik, who has a “buy” rating and $620 price target on the stock, highlighted that the latest Netflix report should mark the low point in terms of subscriber trends. “We expect second-quarter Netflix results to reflect a digestion period after consumers bulked up on streaming subscriptions during the pandemic — a theme we expect to play out across multiple sectors,” he said. “That said, app downloads suggest upside to management’s guide for 1 million net adds in the second quarter given strength in Asia.”

As a result, he boosted his projection to a subscriber gain of 1.9 million from 1 million, followed by net additions of 4.5 million in the third and 8.7 million in the fourth quarter.

Cowen analyst John Blackledge, who rates the stock at “outperform,” forecasts subscriber additions of nearly 1.28 million, including 154,000 in North America, “given Netflix is still working through some of the massive pull-forward” due to the COVID-19 pandemic. “Management has also called out a content slate weighted toward the second half of 2021.”

Much attention will be paid to Netflix’s third-quarter subscriber guidance, because it saw the biggest pandemic boost during the first half of 2020, meaning subscriber comparisons become easier in the back-half of the year.

“Street third-quarter estimates for 6 million net adds seem aggressive, given a still relatively muted content slate, the impact of a multi-region price increase and a series of competitive launches in international markets by Disney+ and HBO,” warned Evercore ISI analyst Mark Mahaney.

And Benchmark’s Matt Harrigan wrote in a Friday report: “We are currently at 3.3 million for the third quarter, with skepticism dictated by global reopening activity despite the delta variant and a typically backloaded second-half Netflix release calendar.”

Morgan Stanley’s Benjamin Swinburne remained bullish, with an “overweight” rating and $650 price target, in his preview report entitled “Summer Break” just before the weekend. “A reopening consumer and the lingering effects of 2020’s production delays suggest risk to consensus second/third quarter estimates,” he wrote. “However, more content is on the way, supporting an increase in net additions in the fourth quarter of 2021/’22.”

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By Troy Warren

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