While recent earnings reports from streaming giant Netflix have been a mixed bag, missing badly just over a year ago when US subs declined and forecasting the first annual drop this decade, then smashing expectations four quarters ago, then beating expectations three quarters ago but disappointing in its guidance, then smashing expectations with a blowout first quarter three months ago in which it added a record 15.8 million subs thanks to covid, but once again offering a somewhat weak outlook for a post-covid world, then tumbling last quarter when the company reported earnings for its first full “post Corona” quarter and warned that “growth is slowing”, investors were on edge today to find out not whether the company would beat or miss expectations, but rather if Netflix, remains a pandemic-proof company and if the slowdown Reed Hastings warned about is for real and has pulled forward even more subscribers due to covid?

To be sure, the company has been riding a wave of optimism, its stock soaring over 60% this year – putting it in the top 15 for S&P 500 companies, similar to the gains seen by other shutdown beneficiaries Amazon.com and Ebay – and trading just shy of its all time high around $556, with investors pushing the shares to new highs and analysts seeing people download its app in record numbers. Still, after surging to a record high in early July, the stock has traded rangbeound, unable to break out to a new high. And while there’s no doubt that viewership has surged during the Covid-19 lockdowns in the U.S. and much of the world, there are complications: the virus has brought TV and film production to a halt, a situation that may only get more dire for Netflix as the months wear on. But the biggest question remains how many future subs has covid brought to the present?

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As Bloomberg writes, options contracts on Netflix expiring this week are heavily skewed toward calls, which on the surface is a bullish indicator for the shares in the run-up to the earnings release (although that could be just SoftBank attempts to manipulate the stock). However, there have been similar setups heading into each of the past three quarterly reports, and the shares fell after the results. This time, calls outnumber puts by a rate of 1.8-to-1. If the most bullish positioning proves prescient, the stock could push back toward the all-time high touched three months ago.

Indicatively, consensus expects 3.32 million new subs this quarter, higher than the company’s own guidance of 2.5 million, and a sharp slowdown from the 10.1 million new subs added in Q2. This is as streaming video remains on a hot streak since the pandemic struck. At the same time, the world’s largest paid streaming service is also facing more intense and cutthroat (or rather cut-price) competition than ever. Comcast’s Peacock platform has been rolling out for a few months, along with the short-form video service Quibi. And AT&T’s big bet on streaming, HBO Max is also up and running now while Disney+ has been a massive hit.

So was Q3 the quarter that would unleash another repricing higher for Netflix stock, or has the triple top telegraphed pain ahead?  Sadly for the bulls, it’s looking very bad with NFLX stock plunging after it reported a huge miss in both EPS and new subs.

  • Q3 Streaming Paid Net Change +2.2MM, Est. +3.3M, down from +10.09MM in Q2 2020.
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While the company’s financials are traditionally secondary, the company again beat on the top line but missed on earnings:

  • Q3 Revenue $6.436B, Est. $6.38B
  • Q3 EPS $1.74, Est. $2.37

And visually:

Confirming the worst case scenario, Reed Hasting started his later in the most dismal way possible: “As we expected, growth has slowed with 2.2m paid net adds in Q3 vs. 6.8m in Q3’19.” He continued: “We think this is primarily due to our record first half results and the pull-forward effect we described in our April and July letters. In the first nine months of 2020, we added 28.1m paid memberships, which exceeds the 27.8m that we added for all of 2019. In these challenging times, we’re dedicated to serving our
members.”

In short, the worst case scenario where covid pulled a lot of demand forward is materializing. And indeed, the outlook was ugly too:

  • Netflix Sees 4Q Streaming Paid Net Change +6.00M, Est. +6.54M

It wasn’t all terrible news: Netflix reported third quarter cash flow of a record $1.145BN vs. -$502 million in the prior year period. Free cash flow positive for a third consecutive quarter at +$1.1b vs. -$551 million in Q3‘19. Year to date free cash flow is +$2.2 billion vs. -$1.6 billion in the first nine months of 2019.

Looking ahead NFLX said that “as productions increasingly restart, we expect Q4’20 FCF to be slightly negative and therefore, for the full year 2020, we forecast FCF to be approximately $2 billion, up from our prior expectation of break-even to positive. This change is due primarily to our higher operating margin expectation for 2020 and the timing of cash spending on content.”

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And yet, generating record cash is irrelevant for a stock which now has confirmed it is “slowing”, and as a result the stock is crashing after hours, down over 6% as we type.

Developing.

Via Zerohedge