Conventional wisdom, in the words of MoffettNathanson Senior Analyst Michael Nathanson, calls for “a massive reacceleration in subscriber growth starting in Q4,” flowing into 2022 with some 28 million new Netflix subscribers.
But, what if that conventional wisdom is wrong, Nathanson asks.
He’s not alone. Shares tumbled at the start of Wednesday’s trading session on the Nasdaq, and were off 4% as of 11:15am Eastern. With more OTT competition and a big slowdown in subscriber growth, is churn a concern — making Sirius XM a sounder investment than the “House of Cards” streaming video pioneer?
Netflix’s Q2 2021 earnings were released on July 20, and missed on guidance. Media reports galore noted the “tepid” forecast for Q3; subscriber growth beat estimates but the downturn in new subscriber additions being seen today is the bigger concern.
For Nathanson, “Despite the below trend net subscriber growth of 18 million from Q4 2020 to the expected Q3 2021,” a rebound starting in October would make sense. Indeed, with returning shows such as Lost In Space and Stranger Things yet to arrive and a plan to drop big titles shortly before the new fall broadcast and cable TV season, there is some conventional wisdom in this assessment.
“Given Netflix’s past ability to drive margin expansion, most forecasters also assume a steady 300 basis points of margin improvement long into the future,” Nathanson says. “This all makes sense given Netflix has executed perfectly over the past five years and hit all key benchmarks, with the company’s history being seen as an indicator of future performance.”
In fact, a “a simple model” of 28 million new net subscribers through 2025, 5% annual RPU growth and 300 basis points of margin expansion delivers an EPS of roughly $32 in 2025, Nathanson says.
That’s highly positive, given his adjustments for year-end 2021 and year-end 2022 Netflix EPS Nathanson has just revealed.
As 2021 comes to a close, MoffettNathanson expects Netflix to earn full-year earnings per share of $10.20, down 10 cents from the firm’s prior estimate.
But, at the end of 2022, Netflix is forecast by MoffettNathanson for EPS of $12.50, up from $12.25. Then comes the real growth.
Given those estimates, churn and questions surrounding Netflix’s increased competition in the OTT space don’t seem to faze Nathanson. Or, do they?
“While clearly not in the bullish camp on this stock, our own 2025 EPS estimate of $26.50 is close enough to conventional wisdom to make us worried that we have become comfortably numb to recent data points.”
Uh-oh. Netflix in 2020 created the North American “UCAN” segment was created, combining the U.S. and Canada. Reviewing the year-to-date data for “UCAN,” only 15,000 net subscribers have been added.
With 14% U.S. and Canada growth in the quarter and further deceleration in the second half of 2021, this makes Netflix’s international markets vitally important. “Our model indeed assumes that Asia-Pacific will drive the bulk of the subscriber growth into the
future, but at a price,” Nathanson said, with lower-priced packages necessary to attain critical mass.
And, with less OTT competition outside of the U.S., the international focus could be paramount — no pun intended — for Netflix investors. In 2022, “UCAN” revenue will slow to high single-digits.
This is where Nathanson addresses Netflix’s domestic competition.
“New entrants and established players have prioritized streaming content while cutting subscription prices to attract new users,” he says. “As such, while streaming as an
industry is in structural growth mode, Netflix’s position as a first mover is clearly being
challenged. As a result, we are not sure that at this point in the penetration curve there are a large percentage of UCAN households that have never experienced Netflix. If anything, middle age appears to be setting in and UCAN subscriber growth may only moderate further. In turn, UCAN revenue growth will likely be led by pricing, which should be valued at a lower multiple than sub growth.”
The data of late shows the majority of the Top 10 streaming programs, according to Nielsen, are on Netflix. At the same time, the new subscriber growth in recent months has plummeted.
Will that turn around once new and returning shows finally return?
“Netflix is pointing to a massive ramp in content delivery in the quarters ahead,” Nathanson says. “By the way, so is Disney, HBO Max, Apple TV+, Amazon Prime, Hulu and Paramount+. At the end of the day, consumer demand around content is fickle and unpredictable and we wouldn’t guarantee that a perfect correlation exists between subscriber growth and content spend.”
When all was said and done, Nathanson and his team raised Netflix’s target price to $465 from $460.
That’s a bit lower than where it stands now, at just below $510 a share.
