'Stronger than ever': Here's what 4 Wall Street banks expect from Netflix's 3rd-quarter earnings report
- Netflix is set to report third-quarter earnings on Tuesday afternoon, offering investors a look at how its subscriber growth has held up after soaring through the start of the pandemic.
- While most of Wall Street has high hopes for the company, many analysts fear that increased competition and the release of a controversial movie could fuel short-term turbulence.
- Here's what four major banks expect when the streaming titan releases its third-quarter report.
- Watch Netflix trade live here.
Netflix is set to report third-quarter earnings on Tuesday afternoon, and despite some near-term concerns, Wall Street remains largely bullish on the streaming platform.
The third quarter saw obstacles emerge from economic reopenings, controversy around the French drama "Cuties," and new competition in the streaming sector. The first half of 2020 boosted the streaming giant as stay-at-home orders fueled a surge of new subscribers and engagement.
Wall Street is now curious to see how Netflix handles the slower economic recovery and a fading of the first-half rally.
Here's what four major banks expect from the streaming giant's third-quarter report, from subscriber-growth trends to future price changes.
Bank of America: 'Cautious stance' on subscriber growth
Analysts led by Nat Schindler see a handful of uncertainties risking a quarterly stumble in subscriber growth. The release of "Cuties" spurred record churn signals from firms tracking Netflix accounts. Increased competition from Disney Plus and Peacock presented hurdles, as did the return of live sporting events. Reopening pressures in the third quarter may have also stifled growth, the team said.
"While we believe Netflix conservatively assumed some normalization of churn, we believe some events such as the 'Cuties' backlash were unforeseen at the point they issued guidance," the analysts wrote on Friday.
Still, Bank of America expects the streaming giant to add 2.5 million new subscribers, roughly in line with its previous guidance. The "cautious stance" on subscriber growth represents temporary turbulence, and Netflix's long-term opportunity is "stronger than ever," the analysts said. The subscriber boost through the first half of 2020 has solidified as a permanent benefit, and healthy cash flow sets the company up for healthy growth as the economy recovers, they added.
RBC Capital Markets: 'Continue to benefit from limited entertainment options'
Analysts at RBC Capital Markets largely expect Netflix's revenue and earnings to land slightly below Wall Street expectations, but they still have a bullish outlook on its shares. RBC said a survey it recently conducted suggested that consumers around the world were willing to pay for multiple streaming services, cutting away at competition concerns.
Netflix also raised prices in Australia and Canada through the quarter, and reports have suggested the company is doing away with free trials in the US. With subscriber growth still set to hit Netflix's 2.5 million target, the higher prices should equate to stronger revenue, the analysts said.
Lasting movie-theater closures also play into the streaming company's hand, RBC said. AMC recently told investors it might run out of cash before the end of the year, and Regal closed all its US locations to shore up capital.
"We think Netflix should continue to benefit from limited entertainment options available for consumers in a pandemic," RBC's analysts said.
Morgan Stanley: 'Netflix's competitive moat is perhaps deeper than ever'
The bank raised its price target for Netflix shares to $630 from $600 in a Friday note. Analysts led by Benjamin Swinburne echoed praises of Netflix's pricing power and, like their peers, expect on-target subscriber growth of 2.5 million additions. The team also expects Netflix to be free-cash-flow positive for the first time since it started building out its streaming service, hitting a key revenue goal as the coronavirus pandemic slams other industries.
While the analysts have some concerns about heightened churn rates, they still view strong engagement levels as an offsetting factor. Netflix's lead in the streaming industry also placed it in an advantageous position once the pandemic began, Morgan Stanley said.
"We believe Netflix's competitive moat is perhaps deeper than ever today," they said, adding that "production delays due to COVID have likely impacted its competitors more significantly."
JPMorgan: 'Download recovery should persist in 4Q'
Analysts at JPMorgan were markedly more optimistic about Netflix's third-quarter subscriber growth. While peer firms expect the streaming service to have added 2.5 million users, JPMorgan said it sees it taking on 5.1 million, citing stronger content and stabilizing daily-active-user growth in September.
The favorable trends are likely to spill into the current quarter and set Netflix up for blockbuster 2020 figures, the team added.
"With September's improvements, more hit content, and traditionally favorable seasonality, daily active user growth and download recovery should persist in 4Q," they wrote in a note to clients. The team projected that Netflix would add 7.25 million new subscribers in the current quarter.
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