'Squid Game' helped drive a big quarter for Netflix, but Wall Street is split on what comes next

Published Wed, Oct 20 20217:27 AM EDTUpdated Wed, Oct 20 20218:01 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

A stronger-than-expected third quarter for Netflix increased confidence for many Wall Street analysts about the company's pipeline, but others are still unconvinced that the stock's lofty valuation is sustainable. Netflix reported $3.19 in earnings per share on $7.48 billion in revenue. The earnings number topped the $2.56 expected by analysts surveyed by Refinitiv, but the revenue number was in line with those estimates. Additionally, the company added 4.4 million paid net subscribers, above the 3.84 million expected, according to StreetAccount. The quarter was helped by the massive success of Korean production "Squid Game." Oppenheimer analyst Jed Kelly, who raised target to $750 per share from $620 per share, said the popularity of that show demonstrated a major growth path for the company in the years ahead. ""We believe NFLX's massive hyperlocal production operations (local TV/film in 45 countries) combined with the ability to distribute content globally is creating a wider moat that, in our view, should allow it to replicate more Squid Game-type sensations over the next decade," the Oppenheimer note said. JPMorgan's Doug Anmuth, who reiterated his overweight rating on the stock, cited the strength of "Squid Game" in raising his price target on Netflix to $750 per share from $705 per share. "While some may have been looking for a higher 4Q outlook based on Squid Game, we believe the hit TV show gives NFLX greater visibility & confidence in the quarter," the JPMorgan note said. However, Michael Nathanson of MoffettNathanson, who has a neutral rating on the stock, was more skeptical of how valuable this part of the business would prove to be in the future. "We would argue that Netflix's strength isn't in the particular greatness of their content development, but in their currently unrivaled mix of global content spending, mass reach, advanced navigation and content surfacing systems with front screen amplification. While this is a moat, we don't think it is as deep a moat as Google's search business, Amazon's delivery and logistical prowess or the ecosystems of Apple or Microsoft," Nathanson said in a note. The quarter was also not enough to make Deutsch Bank more bullish, as the firm downgraded the stock to hold from buy on valuation concerns. Shares of Netflix were down more than 2% in premarket trading. Here's what the other major Wall Street firms said about the earnings report. Citi - Neutral rating "NFLX posted robust 3Q numbers, with operating income and EPS ahead of the Street by +13% and +25%, respectively, and revenue in line. 4Q net add guidance of 8.5 million was in line with current consensus, though production timing and cash content spend is expected to weigh on operating margins and FCF. Overall, NFLX posted a strong 3Q, with a broadly in-line 4Q outlook for net adds. As such, we expect the shares to open positively." Bank of America - Buy rating, price target to $750 from $680 "Recent successful content releases increased our confidence in Netflix's return to strong growth despite tough comps near term. We continue to see a long runway for Netflix to increase its market share from linear TV, and we believe that it is in a strong position to continue raises prices as its engagement continues to increase" Credit Suisse - Outperform rating "Given the 20% run-up in shares the past 3 months investors will be looking for any flaw. To us, subscriber growth and margin guidance for 4Q could prove conservative, and evidence supported a 2022 return to 'normal' as mgmt indicated they felt the service is through the pandemic pull-forward, competition is not having a noticeable impact so far, content is driving a rebound in growth post-pandemic and mgmt believes the service still has pricing power." Barclays - Overweight rating, price target to $675 from $625 "Q3 net adds and Q4 guide, while in line with consensus expectations, effectively point to an average of ~27.5mm subs across '20 and '21 (same as '19), which should provide some comfort to investors worried about a structural slowdown. ... Netflix's north star a few years ago was '…to be HBO before HBO became us' (as per Ted Sarandos) and now HBO isn't even in Netflix's rear view mirror. Management framing of new opportunities seems to indicate that the benchmark now may be to surpass Disney's flywheel." Cowen - Outperform rating, price target to $750 from $650 "NFLX posted solid 3Q21 results, as paid net adds of 4.4MM were above guide of 3.5MM & higher vs our / cons forecast, with ~1/2 of net adds in APAC. Op Income was 13% above our est, driven by lower costs. 4Q21 guide of 8.5MM net adds is driven by an extremely strong film & episodic content slate." Raymond James - Market perform rating "The solid 4Q guide goes some way toward easing concerns around the sustainability of demand trends, and a more balanced content pipeline in 2022 should usher in somewhat of a return to normal. Despite rising competition from other streaming services and forms of entertainment, premier Netflix content still moves the entertainment needle like few others in the industry." Baird - Outperform rating "Yesterday NFLX reported solid Q3 results, including a subscriber beat driven by APAC and EMEA. Q4 subscriber guidance also looks solid, though just in line with consensus forecasts. We had questioned prior to the release whether that would be enough given the recent stronger stock performance, though we remain positive long term. Given a strong market position and ramping content production, we would be more aggressive buyers on any weakness." Atlantic Equities - Overweight rating "The market may have hoped for more given Squid Games but the show did not have a material impact on the guide given the wealth of other content already scheduled for the quarter. Q4 guidance implies 27.5m average adds for 2020/2021, and we are reiterating our 25m adds forecast for 2022. We continue to believe Netflix can exceed 300m subs by the end of 2025 and reiterate our PT of $780, based on 45x 2023 EPS. We believe the in-line guide will help restore investor confidence." Piper Sandler - Overweight rating "We recently raised our NFLX target, which seems appropriate in light of the results. Squid Game has become a viral phenomenon globally. NFLX users are energized about content again, which should continue into 4Q. The long-term subscriber potential for NFLX remains expansive, led by APAC and EMEA." Stifel - Buy rating, price target to $690 from $650 "Netflix reported 3Q results ahead of consensus as the company added +4.4mm subscribers, approximately 900K above prior guidance. Netflix expects subscriber additions of +8.5mm in 4Q, just above consensus of +8.4mm. We are increasingly confident following tonight's results that Netflix is firmly on track to resume its normalized cadence of annual subscriber additions." Loop - Buy rating "The stock has had a strong run the past month. We expect it will digest some of its recent gains and begin to move higher as the new content generates strong engagement. Longer term, we believe NFLX is one of the clear winners of the streaming wars and should continue to increase in value as streaming continues to capture share from linear TV." UBS - Buy rating "3Q subs beat the street; Expect further acceleration in 4Q. Ramping content production and the return of popular series drove 4.4M sub net adds in 3Q, exceeding mgmt's 3.5M guide and the street's 3.8M..... .We continue to believe Netflix is a LT secular winner with substantial scale, penetration upside and pricing power - all supporting higher margins and ramping FCF/sh - with optionality around franchise extension." Goldman Sachs - Neutral rating, price target to $595 from $590 "From current levels, we still see the risk/reward on the shares as evenly weighted. Netﬂix continues to have a long-tailed opportunity around media consumption hours and potential for mature market pricing power. On the other hand, revenue growth is slowing (as the subscriber base creates tougher comps and competitive intensity remains high). Looking forward to 2022, content spend is likely to remain high as Netﬂix builds and scales towards its broader global ambition around global media consumption trends." Jefferies - Buy rating "This is about as subdued as the quarter could have been. 8.5MM paid net adds are squarely in-line and seem to be enough to hold recent price strength; stock down just ~1.5% after hours. It's natural to wonder what 3Q results & 4Q guide would have looked like without Squid Game, but mgmt is insistent that no one piece of content is enough to significantly drive paid net adds given the size of the platform. Still, a Korean show being that popular must have helped APAC." Morgan Stanley - Overweight rating, price target to $700 from $675 "The strong 4Q guidance builds off a better than expected 3Q and reinforces the investment case for NFLX shares as it begins to exit the COVID related impacts to the business over the past 18 months. We have increased confidence in our '22+ net adds, with APAC strength particularly encouraging." Canaccord - Buy rating, price target to $750 from $650 "Netflix reported strong Q3 results as subscriber growth came in above expectations thanks to an improved content slate (particularly in the APAC & EMEA regions), while operating margin was also well ahead of guidance. ... .We continue to see Netflix's robust pipeline of original titles and ongoing investments in diverse video and gaming content supporting strong subscriber growth and pricing power going forward." Guggenheim - Buy rating, price target to $720 from $685 "We saw implied investor enthusiasm as high into the report and feel that results generally met rather than beat expectations. However, we continue to see steady progress on sustainable, long-term growth initiatives (primarily industry-leading global content sourcing and streaming delivery experience) and new opportunities (mobile plans, gaming, and consumer products)." Evercore ISI - Outperform rating, price target to $710 from $695 "This was a solid report card against very elevated expectations, and we came away incrementally more constructive on the strength of the content slate for Q4 and into 2022. We believe the market might be a bit disappointed that the Q4 Net Adds guide wasn't above the Street. ... .Given the very robust strength of the Q4 content slate and the tailwind created by Squid , we suspect that NFLX will continue this steak in 2021, further boosting share price performance." KeyBanc - Overweight rating, price target to $690 from $670 "Netflix reported a solid 3Q, reflecting solid performance from returning (e.g., Money Heist Part 1, Sex Education) and new (e.g., Squid Game) originals. 4Q guidance of 8.5M is slightly above consensus. Given momentum entering the quarter and Netflix's unprecedented 4Q slate (e.g., Money Heist Part 2, The Witcher, major films, etc.), we believe there is an upward bias to estimates, particularly as APAC ramps." Pivotal - Buy rating, price target to $750 from $700 "We remain bulls on the Netflix story as NFLX offers consumers an increasingly compelling entertainment experience on virtually any device, w/o commercials at a still relatively low cost. ... In the end our view is that very few players can (or will) be able to keep up with NFLX content spend levels and that ultimately NFLX will be the dominant global SVOD player with Disney +/Hulu a complementary service and Amazon on the periphery." Needham - Underperform rating "NFLX's total sub growth metrics are becoming less linked to its economics over time, because sub growth is being driven by lower ARPU regions. For example, of total paid net ads of 4.38mm in 3Q21,about half of these (2.18mm adds) came from APAC at a $9.60 ARPU, in part driven by the popularity of Squid Games launch on Sept 17, we believe. We believe NFLX will not work as a stock if it loses UCAN subs, because this will be seen as a lead indicator for all other regions after those become as competitive as the US is today."

The Netflix logo is seen on its office in Hollywood, California.

Lucy Nicholson | Reuters