Streaming giant Netflix is expected to report its second-quarter results after the market closes on July 20, according to Finscreener’s S&P 500 earnings calendar. Let’s see what does Wall Street expects from the company in Q2.
Revenue expected to rise 20.3% in Q2
According to consensus estimates, Netflix (NASDAQ: NFLX) is forecast to increase its revenue by 20.3% year over year to $7.32 billion while earnings per share are estimated to almost double to $3.15 per share in the second quarter of 2021. In 2021, analysts expect NFLX sales to rise by 19% to $29.72 billion while earnings are estimated to grow over 73% to $10.54.
During its last earnings call, Netflix modeled it would reach 208.64 million paying subscribers by the end of June 2021, indicating a year-over-year rise of just 8%. It will represent an addition of one million subscribers, which is the lowest in the last five years. However, subscriber growth was bound to decelerate as vaccination rollouts continue to gain pace and economic restrictions are relaxed all over the world.
The company estimated revenue at $7.3 billion in Q2 which is in line with Wall Street projections. We can see that revenue growth has surpassed subscription growth which means price adjustments in the last 12-months have helped NFLX’s user monetization metrics.
Pivot to gaming
Recently, Netflix surprised investors after the company disclosed it would enter the cloud gaming market. According to a Bloomberg report, Netflix will be adding video games to its platform in the next year. The streaming heavyweight has hired Mike Verdu, a well-known C-level executive who has worked with gaming companies including Electronic Arts and Zynga.
This service is likely to be integrated with the Netflix application. It means you can scroll for games just as you search for any content on Netflix. The highly disruptive move will allow Netflix to gain access to almost 210 million subscribers. While the video games will initially be free-of-cost, Netflix can easily monetize this user base and may very well launch a multi-tier pricing system going ahead. In the last seven years, Netflix has increased subscription rates five times and by a cumulative 75% in this period.
What next for NFLX stock?
Netflix remains on track to generate $30 billion in annualized revenue in the next 12-months. It leads the streaming market and can leverage its position by spending billions of dollars on content creation, thereby increasing user engagement. Netflix’s strong balance sheet and robust liquidity position mean it is poised to spend $17 billion on content creation in 2021 while ending the year with breakeven cash flows.
Netflix has a strong economic moat and can outspend peers which in turn will increase its base of revenue-generating subscribers. The streaming space is a rapidly expanding market due to the cord-cutting phenomenon which means Netflix can continue to grow its subscriber base moving ahead.
Netflix will also continue to improve its bottom-line as it benefits from economies of scale. Its operating margin has risen from 1.4% in 2012 to 18.3% in 2020.
NFLX stock has crushed the S&P 500 in the last decade. Since July 2011, S&P 500 has gained 302% while Netflix has returned a staggering 1,230%. In the last 20 years, Netflix’s valuation has grown by 131,000%.
Netflix stock is trading at a market cap of $236 billion. So, it's valued at a forward price to 2022 sales ratio of 6.9x and a price to earnings multiple of 41x which might seem expensive. But its stellar growth rates can support a premium valuation.
Analysts have a 12-month average price target of $606 which is 14% higher than its current trading price.
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