Analysts are loving Netflix shares into earnings because of mega-hit 'Squid Game'

Published Sat, Oct 16 20219:34 AM EDT

Wall Street analysts are betting big on "Squid Game" heading into Netflix's third-quarter earnings on Tuesday after the bell. While Netflix was undoubtedly a huge beneficiary of the pandemic, the key question for investors has always been whether the company could continue its growth. The streaming giant will need to show significant subscriber momentum, analysts say, in order to satiate shareholders and send the stock higher. Now, analysts are signaling to investors that they believe Netflix will do just that as the company continues to release a treasure trove of content, like the red-hot South Korean drama, "Squid Game." Other key areas investors and analysts will be closely watching include gaming initiatives, merchandising, and competition from the likes of Disney+ and other streaming services. Shares of the company are up almost 8% over the last month and 16% this year. Here's what analysts expect: "We believe that the global popularity of South Korean sourced Squid Game is indicative of the unique value proposition that Netflix brings to content creators and consumers around the world," Guggenheim analyst Michael Morris said. The firm reiterated Netflix as a best idea and went on to say that the streaming giant continues to "emerge from a period of pandemic-driven disruption as the clear global video content leader." Yet other analysts like JPMorgan's Doug Anmuth wrote in a note to clients that the stock's recent trend upward is an indicator that the second half recovery is happening more quickly than expected. Anmuth has the stock as a top pick and added that he sees more upside primarily due to shows like "Squid Game." The feeling was similar at investment firm Argus. "NFLX shares have rebounded from their selloff earlier this year as the market has begun to recognize just how many advantages this streaming video powerhouse has," analyst Joseph Bonner wrote. Credit Suisse analyst Douglas Mitchelson went even further calling a third-quarter miss "off the table." "We have no need for superlatives here regarding Netflix mega-hit Squid Game – its obvious success has raised investor 3Q/4Q subscriber expectations accordingly," Mitchelson said. Meanwhile, Bank of America analyst Nat Schindler wrote that nothing has changed about Netflix's long- term potential. "We continue to see Netflix's ability to grow as its global content investment strengthens its value proposition," he said firmly. No matter happens, though, the Netflix thesis remains firmly intact, according to Baird analyst Will Power. "If 'Squid Game' is any indicator, content is still king," he said succintly. JPMorgan- Overweight rating "Even after the recent stock move we remain positive on NFLX shares based on further strengthening of the content slate in 4Q, greater distance from pandemic pullforward, stronger seasonality, & the potential for greater traction in APAC, where NFLX has low penetration. ... .If there is upside, it could stem from Korean original Squid Game which NFLX indicated could be its biggest show ever. Squid Game was likely a key factor in NFLX's late Sept download spike, including APAC Sept growth of 22% Y/Y." Argus- Buy rating "NFLX shares have rebounded from their selloff earlier this year as the market has begun to recognize just how many advantages this streaming video powerhouse has. Still, we think that a strong release schedule into 2022 may drive subscriber acquisition, revenue and profit." Guggenheim- Buy rating "We believe that the global popularity of South Korean sourced Squid Game is indicative of the unique value proposition that Netflix brings to content creators and consumers around the world. As we have previously noted, the company's focus on developing a sustainable global asset base should further strengthen its content development leadership position, driving member growth and pricing power. ... .We expect the company will emerge from a period of pandemic-driven disruption as the clear global video content leader. Cowen- Outperform rating "While NFLX had spent the last few quarters working through the pull forward of sub adds from the pandemic, the 2H21 original content volume is accelerating and likely to drive higher engagement & potentially lower churn, in our view. ... .Our 3Q21 US survey data from our proprietary monthly tracker continues to be positive in terms of NFLX content relative to other platforms." KeyBanc- Overweight rating "Netflix's 2H recovery appears to have gotten off to a faster start than expected, reflecting the surprise global success of Squid Game. We have raised our 2H paid net add estimates to 11.6M, and are more confident guidance brackets our estimate and consensus of 12.1M." Bank of America- Buy rating "Long term growth story intact; maintain Buy. We believe that Netflix will continue to see long term durable growth despite short term tough comps and increasing competition. We continue to see Netflix's ability to grow as its global content investment strengthens its value proposition." Credit Suisse- Outperform rating "We have no need for superlatives here regarding Netflix mega-hit Squid Game – its obvious success has raised investor 3Q/4Q subscriber expectations accordingly. Our recent discussions with investors suggest an expectation of 4m/8m net adds for 3QA/4Q guide, but only because it is universally anticipated that mgmt will be overly conservative. ... .While we acknowledge the set-up into earnings is heady, a 3Q miss seems off the table, the 4Q slate is terrific, and mgmt commentary is likely to be quite optimistic with Squid Game the latest evidence proving out its international content strategy." Baird- Outperform rating "If 'Squid Game' is any indicator, content is still king. Coupled with multiple other successful launches, Google trends and app download data suggest a subscriber boost in late Q3, which we believe should support solid Q3 results and Q4 guidance. We had expected a stronger 2H'21 content slate to benefit subscriber growth, which we believe is playing out. We remain positive on the longterm position, though with strong stock outperformance since Q2 and the "Squid Game" release, would be more aggressive on any weakness." Stifel- Buy rating "We recently raised our PT to $650 due to our conviction that Netflix is favorably positioned following the pull forward-induced trough in subscriber additions as it successfully releases compelling original content, broadens its international penetration, and enters a seasonally favorable period for sub adds. We remain Buy rated and will review our estimates and PT following the company's 3Q report." Jefferies- Buy rating "After 12+ months of sideways trading, NFLX stock has jumped ~22% in less than 2 months despite little movement in estimates. In fact, NFLX is now trading at 8.5x 2022 revenue ests, the top of its 3-year range despite revenue growth ests of ~14.7% vs > 24% when valuation peaked last. Street is baking in a beat or getting more comfortable with the competitive positioning. We expect the key metric as has been previous quarters will be paid net adds." Evercore ISI- Outperform rating "And while we fully acknowledge the stock's recent price appreciation (up 20% since Disney's June Q EPS on 8/12 to all-time-high territory), we believe a return of Netflix Net Adds to pre-COVID cadence will likely serve as a positive catalyst for the stock." Goldman Sachs- Neutral rating "Netflix stock modestly underperformed the market during the week prior to the Q3 '20 earnings print and significantly underperformed the market the following week on weaker than expected results and forward guide. For Q3 '19, it modestly outperformed the market the week prior to its earning print and significantly underperformed the following week on the back of in-line sub results and weaker than expected guide." Wedbush- Underperform rating "We expect further consolidation among entertainment companies, which suggests to us that less content will be available to Netflix going forward. ... .That said, if we assume that Netflix can expand its content spending at a slower rate than its revenue growth, which its internationalization efforts may allow, it is likely that the company can deliver sustainable free cash flow growth." Evercore ISI- Outperform rating "We fully acknowledge that expectations are high heading into print, and Netflix has gapped up 23% since Q2:21 earnings (which we viewed as a clearing event) to all-time-high territories. That said, while we view the likelihood of significant price appreciation on the print to be relatively low, we believe that given the continued content slate strength heading into 2022, the risk-reward favors the upside and any potential weakness to share prices on the print would be short-lived." Piper Sandler- Overweight rating "We are constructive on NFLX given i) a back-half weighted 2021 content slate, and (ii) the recent success of Squid Game. The note also provides a proprietary Squid Game survey and broader 'Content Refresh' analysis. ... .NFLX traded down post-2Q21 after a weaker subs guide, but is now up over 20% since mid-August. Squid Game and a more robust original content slate may be the key drivers." Morgan Stanley- Overweight rating "We reiterate our OW rating and see 2022 as a year of healthy and accelerating net additions as the rebuilt content pipeline hits the service, starting in 4Q. We continue to see Netflix as the global streaming leader, a business with significant customer growth still ahead and the potential to drive highly attractive returns. This translates into a financial profile that offers an EPS CAGR of 35-40% and even stronger FCF growth."

The Netflix logo is shown in this illustration photograph in Encinitas, California.

Mike Blake | Reuters

Wall Street analysts are betting big on "Squid Game" heading into Netflix's third-quarter earnings on Tuesday after the bell.