Company / Analytics

Analytics, 22 October 2020

Netflix shares fell after Q3 earnings report

U.S stocks opened lower on Monday but have been rising, supported by better than expected corporate earnings reports and progress in stimulus talks. On Tuesday, the S&P 500 gained 0.5%, recouping some of its Monday losses. Technology, communication, and financial stocks powered most of the gains, while household goods makers fell. Read our review on some of the companies that have reported earnings this week, the stimulus talks, and market outlook.

Corporate earnings

On Tuesday traders bid up shares in several companies that reported quarterly results that were better than analysts expected, including Procter & Gamble, Regions Financial, Albertsons, and Travelers.

Procter & Gamble rose 0.4% after the consumer products company reported solid fiscal first-quarter results and raised its earnings outlook. Insurer Travelers Cos. gained 5.6% after its latest earnings topped Wall Street’s estimates, thanks partly to lower-than-expected losses on claims while Albertsons climbed 5.8% following its latest quarterly results. However, the most notable of the Tuesday earnings report was Netflix.

Netflix earnings

Netflix shares fell in after-hours trading after the streaming service following the company’s Q3 earnings report and a tally of new subscribers that fell short of analysts’ expectations. Shares were lower by 5% in premarket, trading at $503.08.

In addition to the mixed earnings report, Netflix also provided a slack guidance forecast that also missed analyst expectations.

Netflix reported $6.44 billion in revenue, operating income of $1.32 billion, along with $1.74 in per-share profit off of the net income of $790 million. Though revenue improved, profits declined. The company exceeded analyst revenue expectations of $6.38 billion but missed out on analyst per-share profit expectations of $2.13.

Analysts were particularly disappointed with Netflix missing on the addition of new subscribers. In its Q2 earnings, Netflix forecasted 2.5m paid net adds for Q3 2020 vs. 6.8m in the prior-year quarter due to its strong first-half performance. However, Netflix reported just 2.2 million new subscriber additions, sharply missing analyst expectations of around 3.3 million for the period.

Subscribers in the Asia-Pacific region were the largest contributor to paid membership growth — a first for the company — accounting for 46% of all global paid net adds.

Looking ahead, Netflix says that in Q4 it expects revenues of $6.57 billion, operating income of $885 million, $615 million in net income, earnings per share of $1.35, and 6.0 million new paid customers in the period.

Netflix executives reported that “The state of the pandemic and its impact continues to make projections very uncertain, but as the world hopefully recovers in 2021, we would expect that our growth will revert to levels similar to pre-COVID,” executives wrote in their letter to shareholders.

What analysts are saying?

Despite the seemingly disappointing earnings, Netflix’s share price is not likely to move too far from its recent all-time highs. The company may take a ding from its profit miss, but nothing material.

Wall Street analysts concur that it might be too soon to give up on the stock, as the stock has gained 62.34% year-to-date.

According to CNN Money, 38 analysts offering 12-month price forecasts for Netflix Inc have a median target of $570.00, with a high estimate of $670.00 and a low estimate of $220.00. The median estimate represents a +8.51% increase from the last price of $525.29.

The current consensus among 43 polled investment analysts is to Buy stock in Netflix Inc. This rating has held steady since September, when it was unchanged from a Buy rating, according to CNN Money.

Stimulus talks

Investors are betting on Washington in hopes that Democrats and Republicans will reach a deal to deliver more aid for the economy. Fading optimism that an agreement on a new relief package will be reached before the election next month led to a late-afternoon sell-off on Monday.

Though the US economy has registered some decent recovery in the past few months, analysts are worried that the growth may be starting to slow. Most believe that additional stimulus aid will benefit the economy.

Analysts are also relatively optimistic that the White House will reach a stimulus deal with congress. According to the Wall Street Journal, Nancy Pelosi and Steve Mnuchin have continued to hold talks to narrow the gap. The two have proposed $2.2 trillion and $1.8 trillion deals, respectively. However, even with a deal between the two, there is a likelihood that the deal will not find enough support in the senate. Indeed, many Republicans in the Senate are opposed to a stimulus that goes above $500 billion.

Stocks have been trading based on lawmakers’ perceived progress — or lack thereof. On Wednesday, U.S. stock index futures rose in early morning trading after White House Chief of Staff Mark Meadows said that House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin have made “good progress” on stimulus talks, before adding that they “still have a ways to go” before an agreement is reached.

Following Pelosi and Mnuchin’s meeting on Tuesday, Meadows told CNBC’s “Closing Bell” that the two will talk again on Wednesday, and that he hopes to see “some kind of agreement before the weekend.”

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