Why Is Netflix (NFLX) Up 10.7% Since Last Earnings Report?

A month has gone by since the last earnings report for Netflix (NFLX). Shares have added about 10.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Netflix due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Netflix Q3 Earnings Top, User Growth Beats Expectations

Netflix reported third-quarter 2021 earnings of $3.19 per share that beat the Zacks Consensus Estimate by 24.6% and surpassed the guidance of $2.55 per share. The figure surged 83.3% year over year.

Revenues of $7.48 billion increased 16.3% year over year but missed the consensus mark marginally by 0.01%. Average revenue per membership increased 7% year over year on a reported basis (5% on a foreign-exchange neutral basis).

The streaming giant added 4.38 million paid subscribers globally compared with 2.2 million in the year-ago quarter and beat its guidance of 3.5 million paid-subscriber addition.

At the end of the third quarter, Netflix had 213.56 million paid subscribers globally, up 9.4% year over year, beating management’s expectation of 212.68 million paid subscribers.

The subscription growth reflects Netflix’s solid content portfolio amid growing competition from services launched by Apple, Disney, ViacomCBS, AT&T, Discovery and Comcast.

The company now expects paid net additions to be 8.5 million, consistent with the year-ago quarter’s paid net additions.

Segmental Revenue Details

United States and Canada (UCAN) reported revenues of $3.25 billion, which rose 11.1% year over year and accounted for 43.5% of total revenues. ARPU grew 9% from the year-ago quarter on a foreign-exchange neutral basis.

Paid subscriber base increased 1.3% from the year-ago quarter to 74.02 million. The company added 0.07 million paid subscribers, down 58.8% year over year.

Europe, Middle East & Africa (EMEA) reported revenues of $2.43 billion, which increased 20.5% year over year and accounted for 32.75% of total revenues. ARPU grew 3% from the year-ago quarter on a foreign-exchange neutral basis.

Paid subscriber base increased 13.3% from the year-ago quarter to 705 million. The company added 1.8 million paid subscribers, up 137.7% year over year.

Latin America’s (LATAM) revenues of $915.3 million increased 16% year over year, contributing 12.2% of total revenues. ARPU grew 3% from the year-ago quarter on a foreign-exchange neutral basis.

Paid subscriber base rose 7.3% from the year-ago quarter to 38.9 million. The company added 0.3 million paid subscribers, up 28.9% year over year.

Asia Pacific’s (APAC) revenues of $834 million rose 31.4% year over year and accounted for 11.1% of total revenues. ARPU increased 2% year over year on a foreign-exchange neutral basis.

Paid-subscriber base jumped 27.9% from the year-ago quarter to 30.05 million. The company added 2.1 million paid subscribers, up 115% year over year.

Content Details

Season 5 of La Casa de Papel (aka Money Heist) and season 3 of Sex Education were two of the biggest returning shows in the third quarter with 69 million and 55 million member households, respectively, choosing to watch these fan favorites in the first four weeks.

Released on Sep 17, Korean drama Squid Game has been ranked as the streaming giant’s #1 program in 94 countries (including the United States). Over 142 million member households globally have chosen to watch the title in its first four weeks.

Netflix’s third-quarter movie slate included Sweet Girl starring Jason Momoa (68 million member households chose to watch in the first four weeks), Kissing Booth 3 (59 million), the animated family film Vivo (46 million) and Blood Red Sky, a German-language action horror movie (53 million).

During the third quarter, Netflix announced that it entered into an agreement to acquire Roald Dahl Story Company. The acquisition will add some world-famous characters to Netflix’s portfolio, including Matilda, The BFG, Fantastic Mr. Fox, Willy Wonka and The Twits.

Netflix has a strong content portfolio for the fourth quarter of 2021 that includes English language series like The Witcher, You, Tiger King and Cobra Kai. Non-English series like Sintonia and the final chapter of La Casa de Papel (aka Money Heist), as well as new movies such as the action film Red Notice, Don’t Look Up, The Harder They Fall, Army of Thieves (the prequel to hit movie, Army of the Dead) and The Unforgivable are also slated for release.

On Sep 20, Netflix announced an impressive 44 Emmy wins this year. The Crown won 11 awards, which included the awards for best drama series as well as best direction and writing for a drama series.

Operating Details

Marketing expenses increased 20.5% year over year to $635.9 million. As a percentage of revenues, marketing expenses expanded 30 basis points (bps) to 8.5%.

Moreover, consolidated operating income increased 33.5% year over year to $1.75 billion, driven by higher-than-expected revenues and subscriber growth. Consolidated operating margin expanded 300 bps on a year-over-year basis to 23.5%.

Balance Sheet & Free Cash Flow

Netflix had $7.52 billion of cash and cash equivalents as of Sep 30, 2021, compared with $7.77 billion as of Jun 30, 2021.

Long-term debt was $14.7 billion as of Sep 30, 2021, down from $14.9 billion as of Jun 30, 2021. Streaming content obligations were $22.4 billion compared with $21.8 billion as of Jun 30, 2021.

Netflix reported free cash outflow of $106.3 million compared with free cash flow outflow of $175 million in the previous quarter.

Guidance

For the fourth quarter of 2021, Netflix forecasts earnings of 80 cents per share. The Zacks Consensus Estimate is pegged at $1.07 per share, higher than the company’s expectation but indicating a decline of 10.08% from the figure reported in the year-ago quarter.

Netflix expects to end the fourth quarter of 2021 with 222.06 million paid subscribers globally, indicating growth of 9% from the year-ago quarter.

Total revenues are anticipated to be $7.71 billion, suggesting growth of 16.1% year over year. The Zacks Consensus Estimate for revenues stands at $7.70 billion, lower than the company’s expectation.

Operating margin is projected to be 6.5% compared with 14.4% in the year-ago quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -23.17% due to these changes.

VGM Scores

Currently, Netflix has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Netflix has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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