Subscribers are the key to Netflix’s business. The more paying subs Netflix accumulates, the more revenue it generates. The rise in revenue gives Netflix more ammunition to invest in content production. New movies and shows attract more subscribers and retain existing members, so the flywheel turns for Netflix.
In its fiscal third quarter ended Sept. 30, Netflix reported 214 million subs. That was 4.4 million higher than the previous quarter and 18 million higher than the same time last year. Demand for in-home entertainment surged at the pandemic’s onset as billions of folks worldwide were spending more time at home. Impressively, Netflix keeps adding subscribers despite economies reopening.
Management expects this momentum to continue and has forecasted adding 8.5 million subs in the fourth quarter. That’s roughly the same amount it added in last year’s fourth quarter and would take the company’s total to 222 million. At that scale, Netflix expects to generate $7.7 billion in revenue in Q4, which, annualized, would be $30.8 billion.
In the nine months ended Sept. 30, Netflix has spent $12 billion on adding content to the platform. If Netflix hits its target of 8.5 million subs in Q4, it’s likely to increase its lead in the streaming industry. Furthermore, that will allow it to spend even more on content in the fiscal year 2022.
What this could mean for Netflix investors?
Analysts on Wall Street expect Netflix to report revenue of $7.7 billion and earnings per share of $0.82 in Q4. If Netflix meets those expectations, it would be an increase of 16% and a decrease of 31%, respectively, from the same time last year. The fall in earnings would be a result of rising spending on content. Recall that content production was significantly constrained in Q4 last year as many restrictions remained in place due to COVID-19.
Regardless, revenue or earnings are not likely to be the primary determinant of how Netflix’s stock responds to fourth-quarter results. Instead, investors should focus on the subscriber figure. If Netflix reports 8.5 million subs or higher, it could be the catalyst that reverses the downward pressure on its stock.
Netflix Short (Sell)
Enter at: 507.08