Stock of the week: Can Squid Game get its tentacles into Netflix earnings?
The world’s largest streaming service Netflix, will release its earnings figures for Q3 on Tuesday. The market expects earnings per share of $2.56. This week there is a deluge of earnings data coming from the US, which will be a big driver for US indices, which last week had their best week since July rising more than 2%, as stellar bank earnings obliterated fears about global supply chains and rising inflationary pressures. We are focussing on Netflix this week because we think that an earnings beat could be met with enthusiasm from the trading community. Netflix’s share price surged to a record high earlier in October on the back of the success of its Korean smash hit Squid Game. The brutal series, which has attracted rave reviews from critics and fans alike, has been watched (for at least 2 minutes) by 132 million people in the first 23 days of its release, with 66% of people who watched the show finishing the series in that time. This has smashed the record set earlier this year by Bridgerton. Although Netflix’s share price has faded slightly in recent days, we believe this is down to some profit-taking ahead of Tuesday’s important release.
Watch to watch for in Netflix’s Q3 earnings report:
As we mention above, we believe that Netflix’s stock price could experience volatility on the back of Tuesday’s earnings release. Below are the most important elements of this release to watch.
1: The impact of Squid Game
Netflix has valued its Korean mega hit at $900mn, which is a spectacular return considering the show cost just over $20mn to make. Netflix rarely releases data about the success of its shows, not so with Squid Game, which is an example of Netflix’s global content making machine at its best. We will be watching to see what Squid Game’s success means for subscription growth in Asia, which has historically been weaker than other parts of the world for Netflix. In September, Netflix saw a download spike in Asia Pacific, with numbers rising by 22%. We will be watching to see if Squid Game led to greater penetration of the Asia Pacific market more generally in Q3. If we see strong subscriber growth in Asia for Q3, then we think that Squid Game could reinvigorate market interest in Netflix, and this may push its stock price back to the October 7th record above $640 per share.
2: Subscriber growth
After Netflix’s own admission about the success of Squid Game, expectations are high. Current investors’ expectations are for 3.5mn global subscriber additions in the third quarter, however, some analysts are expecting that global subscriptions may have risen by more than 3.6mn, due to the hype around Squid Game in recent weeks. Interestingly, market expectations are for subscriber growth of 76k for the US and Canada, down from 177k in Q2. This is largely a result of the enormous subscriber boost during 2020’s pandemic, however, it highlights how important Asia and other locations outside of the US are for Netflix’s growth going forward.
3: Content pipeline
Expectations for Q4’s global subscription additions is a whopping 8.5mn, this is due to a seasonal uplift in the winter months, and also because this is when Netflix usually releases its “blockbusters”. After a series of Covid-related delays, there will be the return of big Netflix shows in Q4 including The Witcher, You and Cobra Kai. There will also be two feature films that are expected to generate mega hype, including Red Notice and Escape From Spiderhead. Analysts will also be looking for a strong pipeline of non-English language content after the aforementioned success of Squid Game, and also strong interest in shows such as Money Heist and Too Hot To Handle: Brazil. As mentioned above, with continued sluggish subscription growth in the US, Netflix must make sure that it continues to build its pipeline of foreign content if it wants to penetrate into new markets. We will also be watching closely for any comments about the purchase of Roald Dahl’s back catalogue for £500mn in September. Since Dahl’s books have global appeal, they have translated into more than 60 languages, it will be worth noting how Netflix plans to monetise this deal. The deal encompasses consumer products and live theatre of Dahl’s back catalogue; thus, a Netflix stage production could be coming to a theatre near you very soon!
4: Gaming
Netflix recently bought its first gaming developer, Night School Studio, and has been trialling a mobile gaming service that launched in Poland earlier this year. The purchase of Night School Studio is a sign that the streaming giant is serious about gaming content. While its current spend in this area is fairly small, we think that it will grow in the coming years, and an update about its future plans for gaming could be cheered by investors.
5: Emerging business lines
As mentioned above, Netflix has already calculated that Squid Game could generate $900mn for the company, and part of this revenue stream will come from merchandising opportunities including selling branded goods, a la Disney. Last week Netflix announced a deal with Walmart to start selling its themed products in its stores, we expect plans for this to be rolled out globally in the coming quarters.
Overall, Netflix have had a busy quarter, releasing new hit content and striking deals to open new revenue streams and business channels. Along with the success of Squid Game, we think that this earnings report should be good news for Netflix’s stock price, and we could see the price return to the record high reached earlier in October. If this level is breached, then we could see another leg higher for the stock price, with some analysts looking for $700 in the medium term.
The chart below, shows Netflix alongside the Nasdaq 100 index. As you can see, Netflix has outperformed the Nasdaq since October, and we expect this to continue if Netflix can deliver strong earnings report this week. Compared to other tech giants, we think that Netflix is less exposed to 1, inflation and stagflation fears, 2, supply chain issues and 3, regulatory scrutiny.
Chart 1:
