Video streaming giant Netflix (NASDAQ:) reported its latest earnings this week and they proved to be a mixed bag for investors.
While the company exceeded analyst expectations for the period ending June 30, the forecast for the current period was lukewarm, suggesting that the slowdown that started early this year has more room to run.
The company added 1.54 million customers in the second quarter. While that was higher than the 1.12 million analysts had forecast — and Netflix's own estimate of 1 million — it's nowhere near the company's growth performance last year, when nearly 26 million new customers joined the first. half signed up for the Netflix service. That was the time when people were stuck at home during the pandemic and flocking to the movies and shows.
The company also told investors it expects 3.5 million subscribers in the third quarter, far less than the 5.86 million analysts had expected. With another disappointing report, Netflix stock came under renewed pressure, rising more than 3% on Wednesday and adding to their 13% decline since January this year. Yesterday, the stock closed at $511.77, down 0.36% on the day.
But this weakness in Netflix stock is a buying opportunity, as some top analysts believe the streaming giant has not yet reached saturation point when it comes to growth. JPMorgan analyst Doug Anmuth raised his price target after the report from $600 to $625 per share, with an overweight rating.
Anmuth wrote in a note:
"This may seem counterintuitive as our 2H subs are falling and consensus net additions in 2022 are likely to happen as well. However, we are increasingly confident in the content of 2H and more reasonable expectations in 2022 should make NFLX safer make to possess.”
His note continued:
"'Cleanup event' may be a common phrase on NFLX in the near term, but we believe it is appropriate nonetheless, and NFLX still has significant opportunities for global secular growth."
New Growth Areas
In the first half of this year, Netflix had fewer major shows to offer as the pandemic disrupted production, but the company now believes this will increase over the course of the year. Netflix's upcoming releases include new seasons of 'La Casa de Papel' and 'The Witcher', two popular shows.
Another reason analysts are optimistic about Netflix's growth prospects is that the company is considering entering a highly lucrative video game market to increase its appeal. The company will add games to its streaming service over the next 12 months at no additional cost to its customers, and the first games will be designed for mobile devices.
"We consider it a core part of our subscription offering," Chief Product Officer Greg Peters said Tuesday. Netflix will develop games in-house as well as license games from third-party studios, just as it does with film and TV.
Morgan Stanley, who has an overweight rating on Netflix with a price target of $650, said in a note that both Q2 results and Q3 guidance were broadly in line with expectations and don't look bad when the economy picks up again. “Looking at 4Q, content investment will increase significantly and net additions should follow. Video games are emerging as the next expansion of the content genre, but it remains early,” the note reads.
Analyst consensus estimate on Investing.com shows Netflix stock is up 20% from its current stock price, with 33 out of 43 analysts assigning the stock an outperform rating.
Bottom Line
Netflix growth is slowing after a strong year, which saw record new subscribers. Despite this slowdown, the majority of Wall Street analysts are optimistic about Netflix's stock as they believe the company has more growth, especially when it ventures into video games.
