Netflix’s NFLX extraordinary Pandemic-driven rally and reign as the streaming king are going to be put to the test when the company reports its Q2 earnings tomorrow (July 16th) after the bell. This is quite possibly the most important earnings report in the enterprise’s history as a public company.
Analysts are estimating that NFLX will report its strongest quarter to date. According to Zacks Consensus estimates, the enterprise is expected to report an EPS of $1.84 on sales of $6.08 billion. This would represent year-over-year growth of 207% and 24%, respectively.
The COVID Effect & Saturating Space
The global pandemic catalyzed what seems like 5 years of digitalization in 5 months, with video streaming platforms being principal beneficiaries. The word has been consuming streaming content like gravy on Thanksgiving amid this unprecedented health crisis, burning through one platform, and moving on to the next.
Consumers’ streaming options have proliferated over the past year. Disney+ DIS accumulated over 50 million subscribers in the first 5 months of its release, surpassing even the most optimistic of expectations, and its global presence is just heating up. I see Disney+ and its deep library of recognizable content as the biggest threat to Netflix’s international growth, which is now its primary topline driver.
Other media conglomerates are entering this quickly saturating space like Comcast’s CMCSA NBCUniversal powered Peacock, which was released to Xfinity users in April and the broader market today (July 15th). AT&T T expanded its HBO offering to include all WarnerMedia’s long history of content, with its new platform HBO Max, which was released at the end of May.
These streaming services have been provided with a rare and unexpected tailwind by the global stay-at-home initiative. I expect this tailwind to continue through the end of the year as pandemic fears persist. This past quarter’s results will give us a glimpse into who the COVID winners and losers are (on a relative basis).
My Netflix Concerns
As more and more media giants enter the space, the more content will be pulled from Netflix’s thinning library. Netflix’s savvy management has been hedging against this unfortunate development, spending billions on original content for almost a decade, but this may not be enough. Netflix knew they had to catch up to its impending competitors’ deep content libraries, and they will continue to rely on original productions to maintain subscribers.
The global pandemic was both a blessing and a curse for Netflix. The enterprise was forced to shut down all production in North America until it is deemed safe to launch again (very uncertain timeline). Netflix’s pipeline of new content is drying up, and many subscribers have watched everything (worth watching) on the platform.
Disney, NBCUniversal, and WarnerMedia have decades of original video content at their disposal and do not need to rely on new productions nearly as much as Netflix. These three media giants could sit on their enormous libraries for years and still keep viewers entertained. This is a concerning thought for someone holding NFLX at 70 times forward earnings.
There has been an enormous amount of growth priced into NFLX, and I wouldn’t be surprised if investors begin pulling profits off this COVID winner following its earnings tomorrow night, regardless of the results.
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