Netflix Oct. 20 will release fiscal third-quarter (ended Sept. 30) results after the market closes. While a traditional flag bearer among media/tech companies during financials, this 90-day period brings added scrutiny. Netflix has been on a tear. Its stock has catapulted 75% since mid-March when the pandemic started — reaching a near all-time high Oct. 16.
But can the SVOD pioneer sustain its skyrocketing subscriber growth during the pandemic, and, secondarily, can it overcome the media/legal fallout from criminal charges alleging the service streamed “lewd material of children” in the French-language movie Cuties?
To be sure, Netflix has tempered its own fiscal expectations, projecting 2.5 million total sub additions worldwide. That’s less than the market consensus of 3.26 million subs. Wedbush Securities media analyst Michael Pachter said he believes the SVOD giant added just 250,000 domestic subs and 2.3 million internationally in the quarter. Netflix added a record 25.9 million subs in the first six months of the year — more than it did for the entire 2019.
Analysts expect operating income of $1.29 billion, while Netflix is projecting $1.24 billion. Over the past 2 years, Netflix has topped earnings-per-share estimates 75% of the time, while trumping revenue projections 75% of the time.
While industry scuttlebutt suggests Netflix lost millions of subs in the quarter due to the controversy over Cuties — a fictional movie about an 11-year-old Senegalese girl coming of age in 21st century Paris against the backdrop of a religious mother and peer pressure from a young female dance troupe — Pachter thinks increased content demands from housebound subs drove churn higher.Follow us HERE on Twitter!The analyst contends that with the increased numbers of consumers still largely confined to home entertainment due to COVID-19, the lack of new original content on Netflix will increase service dissatisfaction.“The extraordinary level of consumption of Netflix content multiplied by its large subscriber base suggests to us that some meaningful percentage of subscribers will ‘finish’ Netflix before a large quantity of new content can be produced,” Pachter wrote in a note.The analyst said Netflix is facing a potential loss of 2 million subs per quarter going forward without a significant increase in original content. Indeed, recent data from Nielsen found that among Netflix’s most-popular shows, 50% were network reruns.“The law of large numbers suggests to us that if the rate of subscriber churn grows by ‘only’ 1%, Netflix could face an uptick loss of subscribers per quarter beginning later this year or early next year,” Pachter wrote. “We suspect that this phenomenon has already begun and led to the company’s lackluster guidance for Q3 net additions.”
Netflix’s skyrocketing subscriber growth during this pandemic year is expected to come to a screeching halt in the third quarter (ended Sept. 30), and going forward. That’s the consensus from Wedbush Securities media analyst Michael Pachter, who thinks the SVOD giant added just 250,000 domestic subs and 2.3 million internationally in the quarter. Netflix is projecting 2.5 million total sub additions.
While industry scuttlebutt suggests Netflix lost millions of subs due to the Cuties movie controversy, about an 11-year-old Senegalese girl coming of age in 21st century Paris against the backdrop of a religious mother and peer pressure from a group of young female dancers, Pachter thinks increased content demands from housebound subs drove churn.
The analyst contends that with the increased numbers of consumers still largely limited to home entertainment due to COVID-19, the lack of new original content will increase dissatisfaction.
“The extraordinary level of consumption of Netflix content multiplied by its large subscriber base suggests to us that some meaningful percentage of subscribers will ‘finish’ Netflix before a large quantity of new content can be produced,” Pachter wrote in a note.
The analyst believes Netflix is facing a potential loss of 2 million subs per quarter going forward without a significant increase in original content. Indeed, recent data from Nielsen found that among Netflix’s most-popular shows, 50% were network reruns.
“The law of large numbers suggests to us that if the rate of subscriber churn grows by ‘only’ 1%, Netflix could face an uptick loss of subscribers per quarter beginning later this year or early next year,” Pachter wrote. “We suspect that this phenomenon has already begun and led to the company’s lackluster guidance for Q3 net additions.”
Throughout the coronavirus pandemic Netflix has shattered the odds and competition attracting more new subscribers in six months this year than it did for the entire 2019. The service ended June with more than 190 million subs worldwide.
Retaining those subs is another story — and challenge. While subs flock to market pioneer Netflix in droves, keeping them entertained without a steady supply of fresh content is problematic in a COVID-19 era that has effectively shuttered or significantly slowed content production.
Michael Pachter, media analyst with Wedbush Securities in Los Angeles, says Netflix has very high levels of consumption per subscriber (an average of 30 to 40 hours per month pre-pandemic and likely 50 to 60 hours per month now). In contrast, most of Netflix’s competitors have much smaller subscriber bases (Disney+ at an estimated 75 million, Hulu at an estimated 35 million, and the other competitors significantly lower). While a high level of consumption is desirable, it drives a need to constantly replenish the content consumed, and Netflix’s extraordinary level of consumption multiplied by its large subscriber base suggests to Pachter that some meaningful percentage of subscribers will drop Netflix before a large quantity of new content can be produced.
Specifically, the analyst believes Netflix could lose upwards of 2 million subs per quarter going forward without a significant return to normalcy within the studio industry to create content. Netflix is projecting 2.5 million new subs in the third quarter (ending Sept. 30), while Wall Street is projecting 5.27 million.
“We suspect that this [sub decline] phenomenon has already begun and led to the company’s lackluster guidance for Q3 net sub additions,” Pachter wrote in an Aug. 24 note. “Once the pace of its delivery of new content begins to wane, we expect Netflix to see higher churn and much slower subscriber growth.”
While production slowdowns affect all streaming video services, with many operating on the studio coat tails of corporate parents, content shortages at NBCUniversal’s Peacock and WarnerMedia’s HBO Max are less severe due to their respective deep catalogs of content.
All of Netflix’s competitors are similarly disadvantaged. None will be able to produce content at a meaningfully faster pace than Netflix, and all streaming services will be challenged to produce new content for the first half of 2021. This is likely to create a competitive disadvantage for Netflix, Pachter says, given that the company’s library of owned content is relatively thin, while its competitors have been producing original content for decades.
“Of course, [Netflix] can bid for library content, but its competitors are similarly likely to bid on the same content, driving up the cost of library content and contributing to a return to negative free cash flow next year,” Pachter wrote.
Netflix ended Q2 free cash flow positive for the second consecutive quarter, at $899 million compared to negative $594 million in the previous-year period. Wall Street cares about free cash flow since it is a way of looking at a business’s finances to see what is available for distribution among all the securities holders, including investors.
