Netflix Bounces Back As 12% Share Price Boost Expected on Q3 Results

The Netflix share price is expected to leap 12% when market open on Wall Street today after the content streaming giant turned around disappointing Q2 figures on new subscribers. The company added 7 million new subscribers against the backdrop of analyst forecasts for 5.3 million. After hours trading signalled strong market approval of the surge with futures at one point up 16% on the Netflix share price’s close.

Last week’s significant stock market correction was led down by the FAANG technology stocks that have driven much of this year’s stock market gains. A portion of those losses were overturned on Friday but a reversal yesterday meant that those investing online in the U.S. technology giants will have approached yesterday evenings Q3 Netflix results with some trepidation. A strong set of FAANG results for Q3, with Facebook, Amazon, Apple, Netflix and Alphabet all to publish results for the three months to the end of September, could set a positive tone for the end of the year. Alternatively, with market jitters becoming increasing apparent, disappointments, or even results just meeting forecasts, could deepen the malaise.

Within that context, Netflix’s strong performance will bring some cheer. Together with Facebook, whose Q2 report indicated stagnation in U.S.-based active user numbers, and a slight slide in Europe, Netflix underperformed 3 months ago. Apple, Alphabet and Amazon surpassed forecasts, with the significant divergence calling into question the wisdom of those investing online treating the FAANG group as a unified ‘giant tech’ sector expected to rise and fall in unison.

The combination of the slump in share price suffered by Netflix after July’s disappointment and the recent slide for tech stocks as a sector and the FAANGs in particular had put pressure on the company to come up with the goods yesterday and investors weren’t disappointed. With competition increasing and new subscriber numbers slowing down in the USA, Netflix is heavily reliant on massive newer high growth markets such as India and Brazil to drive the growth necessary to justify its significant value multiple, which is approaching x50 projected 2019 ebitda. The ‘online’ sector’s average is x14.

Strong growth in subscriber numbers is particularly important to investors within the context of Netflix’s huge debt-financed spend on creating original content. One of the most positive aspects to yesterday’s report was figures showing a return to strong growth in the domestic USA market, which accounted for 1.1 million of the overall 7 million new subscribers. Netflix’s own forward guidance had been for 650,000 new U.S.-based subscribers and 4.35 million internationally.
 

New seasons of popular Netflix original shows such as Orange is the New Black and American Vandal as well as well received brand new shows like Sacred Games and Maniac are thought to have been a factor in the strong quarter. Net income jumped to $401 million from $103 million over the same period last year, the equivalent of 89 cents a share from 29 cents a share. 69 cents a share had been the expectation. Overall revenue also leapt 34% and now stands at $4 billion, in line with forecasts. It had also been expected that the company would show some conservatism on forward guidance around Q4. However, Netflix stated it expects Q4 to yield 9.4 million new subscribers globally against expectations for the target to be set at 8.35 million.

Investors will now hope that the rest of the FAANGs follow the lead set by Netflix yesterday as they publish their own Q3 results over the coming several days.