Netflix will become the first of the FAANG stocks to report its third quarter results later today and those investing online in stock of the streaming service will hope a repeat of July’s miss of new subscriber targets is avoided. Netflix specifically, and the FAANG group as a collective, could do with a strong set of earnings reports following the recent correction. Q2 saw divergence in performance between the tech giants as Apple, Amazon and Alphabet beat analyst forecasts by some margin while Facebook and especially Netflix fell short.
The stock market sell-off over the last couple of weeks hit the FAANG stocks particularly hard with Facebook, Amazon, Apple, Netflix and Google (Alphabet), collectively shedding over $600 billion (£454.65) from their recent highs. Friday saw Wall Street’s tech giants recover a small portion of recent losses but investors in the FAANG group, which has seen huge gains over 2018 so far, will be nervously waiting for the market reaction to performance over the three months to the end of September. Netflix and the other FAANGs posting strong results could reverse or at least halt the recent sell-off.
And Netflix is first up when it posts after U.S. markets close today. In July markets were disappointed by new subscriber numbers dropping well short of forecasts as they came in an entire million less than had been hoped for. The company blamed issues within the company’s in-house forecasting methodology for the scale of the divergence but whatever the root cause of the gaping chasm between expectations and reality, markets won’t tolerate another comparable mishap against a backdrop of increasing investor nerves.
Before Netflix’s Q2 misstep, the television and film streaming company had surpassed the market capitalisation of Walt Disney to become the world’s most valuable media company. However, approaching today’s update to markets the share price sits around 15% off its pre-Q2 report high of over $418. Netflix share price closed Monday at $333.13.
There are, however, some clues that today’s report could see Netflix return to its forecast-beating form of previous quarters. New downloads of the Netflix app are considered a good indicator of new subscribers and app analytics company Sensor Towers estimates subscriptions made through the app show 90% year-on-year growth for Q3. That’s based on 50 million new users of the app. Even more optimistically, Sensor Towers data suggests that not only has Netflix returned to strong growth in big new markets such as India and Brazil but USA-based subscriptions have bounced back.
Those investing online in Netflix shares will be paying close attention to Q4 forward guidance. It is expected that this time around the company will likely have achieved its target of 5 million net new subscribers but there are concerns, recently voiced by Goldman Sachs analysts, that Q4 targets may be toned down. The investment bank has a price target of $430 for the stock, which would still represent strong growth on the current Netflix share price of $333, despite it representing a downward revision from $470.
There is an analysts split when it comes to pricing Netflix stock. Bears argue that the company is valued at a far higher 2019 ebitda multiple than other companies defined as ‘internet based’, with the current share price x47.5 compared to a sector average of x14. Bulls believe that analysts underestimate the size of the global market available to Netflix and the growing value it will be able to leverage with distributors and content creators.
However, this must also be taken within the context of growing competition in the streaming sector. As well as Amazon Prime, Apple and Walt Disney are poised to launch new streaming apps with telecoms giant AT&T also thought to be partnering with Warner Bros and HBO on content for an app to launch next year. Even giant bricks and mortar retailers such as Walmart and Costco are thought to be preparing digital entertainment apps.