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Squid Game helps boost Netflix share price

Netflix share price: the Netflix and Squid Game logos appear on separate devices

Despite disappointing on Q3 user growth expectations back in July, the Netflix share price, after initially dropping, has spent the rest of this past quarter reversing those losses, and reaching new record highs earlier this month, so expectations for last night’s quarterly numbers were already elevated.

Netflix is under attack on multiple fronts in the highly competitive streaming market, but still remains the market leader when it comes to streaming content despite the likes of Disney+, Apple TV+, Warner Media/Discovery, and Amazon, who recently added the MGM back catalogue to its Prime offering.

While its US market is pretty much saturated, and given to quite a bit of churn, on a global scale Netflix remains out in front with over 210m subscribers, and is very much holding its own. This was despite its worst start to a year for subscriber growth since 2016, while the downgrade to its Q3 expectations didn’t help.

Netflix share price hit by Q3 subscriber forecast

Q3 subscriber estimates were downgraded in July from 5.86m to 3.5m, which was the main factor that drove the fall in the Netflix share price back then. Last night’s improvement to 4.4m suggested that management were slightly too pessimistic on that score, however they probably didn’t bank on the success of Squid Game, which helped drive the numbers higher, with half of those new subscribers coming from the Asia-Pacific region.

On the revenue front the picture continues to be positive, coming in line with expectations at $7.48bn, while profit beat expectations, coming in at $3.19 a share.  

Q4 revenue set to improve while profit falls

Estimates for Q4 pointed to further improvements in revenue, with an estimate of $7.7bn, while profits are expected to fall back to $0.80 a share, due to higher spending on content, and lower operating margins, which are expected to fall from 23.5% in Q3, to 6.5% in Q4. The downgrade to Q4 profit was disappointing and was lower than consensus of $1.10 a share. Full-year operating margins are still expected to come in at 20% or slightly better, despite the higher spend in Q4.

While improvements on the revenue front show that Netflix is proving effective in maintaining a steady cashflow, it looks increasingly likely that any ambition to be cashflow positive this year may get pushed into 2022, with 2021 expected to see the company breakeven. 

It's becoming quite clear that while revenues are continuing to rise, Netflix is feeling the heat from the increasing competition of its peers. So far it has been able to pass on price increases and still grow its user base, with most of the new subscribers coming from the Asia-Pacific region, with the company expecting to add 8.5m new subscribers in its final quarter.

Rosy outlook could boost Netflix share price

For Q4, Netflix expects to launch a number of returning series including The Witcher, Cobra Kai and Tiger King, while viewers are still keenly awaiting new seasons for Stranger Things and Lost in Space. 

As Netflix increasingly focuses on its international markets, there appears little sign that revenues are slowing, and the scope for user growth, particularly in international markets, still looks fairly decent, even when measured against 2019 subscriber growth numbers.

With the addition of streaming video games on mobile devices, and the recent acquisition of the Roald Dahl Company, the potential for management to grow and diversify the business towards a younger cohort, as well as existing users, can't hurt either.

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