Netflix Q3 preview: Where next for Netflix shares?

When will Netflix release Q3 results?

Netflix will release third quarter earnings on Tuesday October 19.

Netflix Q3 earnings preview: what to expect from the results

Netflix saw an explosion in demand during 2020 when the pandemic kept everyone at home and encouraged people to spend more on entertainment that could be enjoyed from their own sofas.

However, that then led to a slowdown in growth that started halfway through last year as the demand unwound and its content slate started to suffer because of pandemic-related disruption to filming. For example, it added almost 26 million subscribers in the first half of 2020 but only managed to add 5.5 million in the first six months of 2021, adding 4 million in the first quarter and just 1.5 million in the second.

Although the slowdown has been rightly blamed on the impact of the pandemic last year, it has nonetheless prompted concerns that Netflix has been losing momentum - especially as competitors like Disney+ and Apple have been growing at a faster rate, albeit from a lower base.

However, investors are hoping the third quarter will have marked an inflection point, with Netflix aiming to add 3.5 million subscribers to take total subscriptions to 212.7 million. Notably, Wall Street is expecting Netflix to beat its guidance like it did in the last quarter, forecasting it added 3.7 million new subscribers, according to consensus numbers from Bloomberg.

If Netflix achieves that growth in the third quarter, then it will have added 54 million subscribers over the last 24 months and 27 million on an annualised basis – which would be in-line with the rate of growth delivered before the pandemic hit, suggesting the uneven growth seen over the past 18 months is finally starting to smooth out.

One reason subscriber growth is expected to have improved in the third quarter is a stronger slate of content, demonstrated by the huge success of South Korean hit ‘Squid Game’ since it was released in September. The severe disruption for the TV and film industry in 2020 led to a weaker set of releases during the first half of 2021. But Netflix said its slate will be significantly stronger in the second half now that productions are back up and running, which should attract more people to the platform.

Notably, Wall Street is anticipating subscriber growth will gain further traction in the fourth quarter of 2021, with analysts forecasting it can add 8.4 million subscribers – a number to keep in mind when looking at Netflix’s outlook to see if the company agrees with the bullish expectations. That would also set a buoyant mood ahead of entering 2022, when investors will hope new initiatives – like its tentative and cautious entry into the gaming market – can add new catalysts.

Netflix is aiming to deliver $7.47 billion of revenue and EPS of $2.55 in the third quarter. Analysts expect Netflix to marginally beat that guidance with revenue of $7.48 billion and EPS of $2.56, which would be up from the $6.43 billion in revenue and $1.74 of EPS delivered in the third quarter of 2020.

Margins will be closely-watched. Netflix is aiming to deliver an operating margin of 20% in 2021 but analysts expect this to take a temporary hit in the third quarter due to the ramp-up in spending on content. Free cashflow will also be under the spotlight after fluctuating between cash generation and cash burn over the last year. Netflix has said free cashflow should be largely breakeven over the year as a whole which, if achieved, would install further confidence in Netflix’s promise that it won’t need to raise any more cash to fund its day-to-day operations.

The 45 brokers that cover Netflix have an average Buy rating on the stock but, with Netflix shares having rallied over 19% since the start of the year and hitting fresh all-time highs last week, the average price target of $625.38 suggests the company is adequately valued.

Where next for the Netflix share price?

Netflix share price has been trending higher since June hitting an all-time high of $646 in early October. Whilst the price has eased off the all-time high, the uptrend remains intact.  It trades above its 50 & 100 sma on the daily chart. The RSI is supportive of further upside whilst out of overbought territory with a move over $646 needed for fresh all-time highs. 

It would take a move below support at $614 to negate the near-term uptrend. This would then expose the 20 sma at $605 ahead of the 50 sma at $572. Meanwhile a move below $568 the September low could see sellers gain traction. 

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