Shares of Netflix (NFLX) were down today, closing 2.17% lower, even through the company reported after the close yesterday that it had added 4.38 million new subscribers. That was well above the company’s own forecast of 3.5 million new subscribers and Wall Street projections of 3.78 million for the third quarter.
But the higher than projected numbers of new subscribers weren’t enough.
The problem was lower than expected forecast profits for the coming quarter and what that implies for profits at the company in 2022.
For the just completed third quarter Netflix earned $3.19 a share on sales of $7.48 billion. Analysts were looking for earnings of $2.56 a share on sales of $7.48 billion, according to FactSet.
For the current fourth quarter, however, Netflix expects to earn just 80 cents a share on sales of $7.71 billion, the company said in its conference call. Wall Street had been projecting Netflix earnings of $1.13 a share on sales of $7.66 billion in the fourth quarter.
Why does the company project that fourth quarter earnings will fall off a cliff: a resumption of heavy spending on new content. “After a lighter-than-normal content slate in Q1 and Q2 due to Covid-related production delays in 2020, we are seeing the positive effects of a stronger slate in the second half of the year,” Netflix management said in a letter to shareholders. “We’re very excited to finish the year with what we expect to be our strongest Q4 content offering yet.”
The financial implications here are a little disquieting–if you’re a Netflix investor.
Absent a global Pandemic to drive subscriber growth, the company will have to spend heavily to add new views.
That conclusion is implicit in the company’s steep drop in new subscribers in the second quarter. Absent a Pandemic that kept people home and that closed many competing sources of entertainment, Netflix added just 1.5 million new subscribers in the quarter because the Pandemic had also curtailed the production of new content.
With a return to a full schedule of content production, Netflix will be able to resume its torrid growth–the company is projecting adding 8.5 million new subscribers in the current fourth quarter.
But the cost of that content will be so high that it will send the quarter’s earnings down to 80 cents a share from $3.19 in the third quarter.
The implication is that Netflix faces so much competition from Disney (DIS), Apple (AAPL), Amazon (AMZN) Comcast (CMCSA) and others that it will have to run (and spend) as fast as it can on the content treadmill just to stay in place. In January 2021 Amazon had a 12% market share, Disney was at 6%, and Apple 4%.
Barry Ritholz wrote an “interesting” piece in the October 15 edition of his Big Picture Blog Competitive advantages fade, he noted. “But a > 50% market share [for Netflix today] is down from domination when they invented the sector 12 years ago. Does anyone imagine that Netflix will be dominant in 50 years? What about 20 years? 5? I don’t know, but if history is any guide, at a certain point, that first-mover advantage will in large part erode away.”
That’s an important question for a stock that trades at 56 times trailing 12-month earnings per share–that’s before the projected drop in fourth quarter earnings.
