Netflix Q4 preview: Where next for Netflix stock?

Netflix is expected to report its strongest subscriber growth in the last year when it releases results later this week, but how will Netflix shares respond?

Netflix

When will Netflix report Q4 earnings?

Netflix is scheduled to publish fourth quarter earnings on Thursday January 20.

 

Netflix Q4 earnings preview: what to expect from the results

Netflix is forecast to have added 8.4 million paid net additions in the fourth quarter, just below the 8.5 million guided by the company, to end the period with just under 222.0 million subscribers. That would mark the strongest quarter in a year. That would also signal that subscriber growth is starting to normalise once again after growing unevenly since the start of the pandemic.

(Millions)

Q4'20

Q1'21

Q2'21

Q3'21

Q4'21E

Paid Net Additions

8.51

3.98

1.54

4.38

8.44

Total Paid Memberships

203.66

207.64

209.18

213.56

221.96

 

This should see Netflix report net additions of 18.3 to 18.4 million in 2021. That will be down from 36.6 million last year when demand exploded during lockdown. However, it is important to note that the uneven growth has been consistent when smoothed out. Annual additions over 2020 and 2021 combined should average out at around 27.5 million, in-line with what it was delivering before the pandemic hit.

The initial outlook for 2022 will also be keenly watched. Analysts currently believe Netflix will add just under 6.4 million new subscribers in the first quarter of 2022 and 24.4 million over the year as a whole.

One of the main reasons subscriber growth has reaccelerated in the second half of 2021 is a stronger film slate. Production was heavily disrupted during the pandemic and, given the time it takes to create new top-quality content, this has only started to ease in the last six to seven months. Netflix released a number of big-name titles in the quarter built on established brands, including new series of The Witcher, Tiger King and Cobra Kai. It also unleashed new films with blockbuster casts, such as Don’t Look Up with Leonardo DiCaprio and Jennifer Lawrence and Red Notice featuring Dwayne Johnson, Gal Gadot and Ryan Reynolds. Its leadership in non-English content will also be watched after it released the final chapter of its popular Spanish series Money Heist. Netflix is currently producing local TV and film in 45 countries, underpinning its appeal as a global platform.

Netflix has said it expects a ‘more normalised content slate in 2022’ assuming the pandemic does not cause any further disruption to production. This should see a more balanced release of new content compared to 2021, and Netflix has said that it intends to release a greater number of original titles this year than last. Notably, Netflix has decided to report its most popular series and films by the number of hours people have spent watching them from the fourth quarter, abandoning its previous model that focused on the number of accounts.

The gradual ramp-up in spending as production returned to normal in the back-half of 2021 will have consequences, with Netflix warning its operating margin will be squeezed to just 6.5% in the final quarter. For context, Netflix has vowed to deliver an operating margin of 20% ‘or slightly better’ in 2021 as a whole, which would mark an improvement from 18% in 2020. It has also said free cashflow will be negative in the final quarter but roughly breakeven over the full year. It has said it is aiming to generate positive free cashflow in 2022 and has reiterated that it will not need to raise more cash from external sources, including shareholders, again. Analysts currently believe Netflix can generate over $963 million of free cashflow and grow its operating margin to over 22.7% in 2022.

A Bloomberg-compiled consensus shows analysts are expecting Netflix to report revenue of $7.72 billion in the fourth quarter, in-line with guidance, compared to $6.64 billion the year before. Wall Street forecasts diluted EPS will drop to just $0.80, also in-line with Netflix’s target, from $1.19 the year before.

($)

Q4'20

Q1'21

Q2'21

Q3'21

Q4'21E

Revenue (Billions)

6.64

7.16

7.34

7.48

7.72

Diluted EPS

1.19

3.75

2.97

3.19

0.8

 

In terms of the outlook for 2022, analysts are expecting Netflix to target revenue of $8.1 billion, an operating margin of 24.6% and EPS of $3.35 in the first quarter of 2022.

Investors will also be watching out for commentary on Netflix’s big entry into the gaming market as this is seen as the next big potential catalyst for the stock. Netflix has launched its first mobile games, but management have stressed it is still very early days and that progress will be slow and steady, so don’t expect any ground-breaking developments this time around. Netflix has stepped-up its acquisitions in this space in recent quarters, which has forced it to slow the pace of buybacks. Over the long-term, investors hope this will add value to the cost of its subscription (especially as prices rise) and potentially bring in a whole new audience to provide exposure to the rapidly-growing gaming industry.

 

Where next for NFLX stock?

Netflix shares have trended lower since hitting all-time highs of $700.99 in mid-November, and currently sit at a five-month low.

The stock gapped lower during the first week of trading in 2022, which also pushed the RSI into oversold territory. That supports the view that the stock could soon start to rebound, but we may see shares slip to as low as $505, a key level of support last July and August, before going on to close the gap toward $566, in-line with the 200-day sma.

If the rebound gains momentum, the stock will be looking to recover the losses booked over the past three weeks toward both the 50-day and 100-day sma at $616.

However, it is worth noting that the 50-day sma is on the verge of crossing the 100-day sma which, if completed, would provide a new bearish signal, especially as volumes grow ahead of the earnings. If the stock continues to trend lower and slips below the $505 mark then it could fall toward the next level of support that emerged last May of $477.

Where next for Netflix stock?

 

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