Netflix and The Wishful Market

Netflix and The Wishful Market

Investors don’t want to miss out on a bear market bounce should earnings reports come in better than expected. That is wishful thinking.

Netflix (NFLX) shares ran on Monday ahead of the company reporting earnings on Tuesday after the close. NFLX ought to be a good barometer for consumer spending.

Q3 2022: One would expect Netflix to come in light versus its Q3 outlook based upon the appreciating Dollar alone, not to mention inflation’s adverse impact on consumer discretionary spending. Revenue, EPS and Paid Memberships are all likely to come in light versus the company’s Q3 Revenue, EPS and Premium Memberships outlook of $7.838 B; $2.14 and 221.7 million respectively. Q3 Street estimates are essentially in-line with the company. More important is the outlook for next year.

Q4 and 2023: December quarter and 2023 Revenue and EPS estimates appear inflated when one considers the economic climate not only in the U.S. but in Europe where inflation is far worse as is the negative impact on demand. For the Street to expect NFLX Revenue to grow by 8% in 2023 is awfully bullish. Where is that Revenue growth coming from? Paid Memberships are likely to decline in 2023 versus 2022. NFLX won’t exactly have pricing power next year. Why would I pay 20x 2023 EPS when EPS and subscribers are likely to decline?

I believe that not only will earnings decline in 2023 for many Technology companies, but there is still plenty of room for multiple compression.

Advertising: Analysts that hang their hat on Netflix’s new Advertising-driven tier are forgetting that the company’s core business is its subscription business. Should the subscription business roll over in Q4 and next year (we expect it will), the Advertising business will be an afterthought.

M&A: The best thing Netflix can do to protect revenue and earnings is to acquire premium content. Video games in particular should be a core M&A focus as we have advocated for several years. There are lots of small to medium-sized gaming studios to acquire.