This Is Why The Competition Will Never Catch Netflix

Will investors watch the Netflix share price rise?

The Netflix share price [NFLX]performed well during the pandemic as the streaming platform kept people entertained during lonely lockdown days.

This article was originally published on Opto – Invest in the Next Big Idea.

The Netflix share price surged 91% from $263.08 at the close on 23 September 2019 to $502.41 at the close on 20 July 2020 as new subscribers switched on.

The Netflix share price climbed 80.9% from its low in March 2020 to end the year at $540.73. It crept up higher throughout the following, hitting $586.34 at the close on 20 January 2021.

However, the Netflix share price then suffered alongside other tech stocks as investors feared higher inflation and interest rates. There were also concerns about the impact of the re-opening of societies and venues such as cinemas.

Will the Netflix share price rise again following its earnings, due on 20 July?

Membership mishaps

The Netflix share price was also hit by mixed first-quarter results released on 20 April. Netflix recorded a 24% hike in revenues to $7.16bn, with earnings per share of $3.75, ahead of estimates of $2.98.

However, Netflix (CEO Reed Hastings pictured) revealed it had gained only four million paid net additions, below the six million guidance.

This, it said, was the result of a “big pull forward’” in memberships in 2020 and “lighter content” because of COVID-19-related production delays.

Netflix has previously forecasted that it expects only one million new additions in the second quarter, compared with 10 million last year.

The Netflix share price plunged 8.2% between 19 and 21 April. And continued to slip, hitting $485.81 at the close on 9 June. However, the Netflix share price rallied recently, climbing 12.8% to reach $547.95 at the close on 14 July (before slipping lightly to $530.31 on 16 July). The rally was driven in part by diminished interest rate fears and customers remained cautious about visiting indoor venues.

Good viewing?

“Netflix’s business model was best-suited to helping customers during a pandemic, but the shares can point to a relatively meagre 10% gain over the last 12 months as economies unlock, consumers look to get out of the house and Amazon [AMZN], Disney [DIS] and others crank up the competition,”  Russ Mould, investment director at AJ Bell, noted.

Zacks Equity Research expects Netflix to post total revenues of $7.3bn, which would represent an 18.8% year-on-year increase. Paid additions will be slightly higher than forecasts at 1.04 million, helped by new titles such as Zack Snyder zombie movie Army of the Dead.

Earnings per share are tipped to come in at $3.20, compared with $1.63 a year ago.

However, according to AJ Bell, analysts then expect only $2.16 growth in Q3 and $1.51 in Q4, as expenses increase and “subscriber growth remains relatively muted after 2020’s bonanza”.

UBS analyst John Hodulik has a buy rating and $620 price target for the Netflix share price. “We expect second-quarter Netflix results to reflect a digestion period after consumers bulked up on streaming subscriptions during the pandemic,” he said. “That said, app downloads suggest upside to management’s guide for 1 million net adds.”

He envisages a 1.9 million gain with 4.5 million in the third quarter and 8.7 million in the fourth.

Wedbush analyst Michael Pachter has an underperform rating and $342 price target. “Netflix is approaching market saturation in North America, with its nearly 75 million members comprising around 60 percent of all households,” he said.

This point was also picked up by Richard Broughton, media analyst at Ampere. He told The Guardian: “Netflix has become a victim of its own success. It has largely signed up all the young audiences already.”

Netflix, though, is confident that short-term wobbles will not disrupt the long-term picture or the Netflix share price.

The growth opportunity is still there. Despite huge brand power, Netflix still accounts for only 10% of total US TV screen time, according to a report fromThe Motley Fool.

Netflix is also looking at expansion into video-game streaming and selling online merchandise from its shows.

“The rise of streaming to replace linear TV around the world is the clear trend in entertainment,” it told shareholders in the first quarter.

Investors can follow the Netflix share price in ETFs such as the SPDR NYSE Technology ETF [XTNK], where it has a 2.69% weighting as of 16 July, and the Global X Millennials Consumer ETF [MILN], in which it is weighted at 2.84% at the same date. These funds have year to date total daily returns of 8.63% and 13.8% respectively.


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