Streaming giant Netflix Inc NFLX is scheduled to report its fiscal-year third-quarter results on Oct. 20. After stellar performances in the first two quarters of the year, expectations are muted for the third quarter.
The Netflix Analyst: Needham analyst Laura Martin has an Underperform rating on Netflix.
The Netflix Thesis: The second quarter saw Netflix's streaming hours increasing 50% year-over-year due to the company possessing the "only original content" and a lack of competition from live sports, cinemas, etc., Martin said. These conditions are no longer true in the third quarter.
Martin highlighted seven worrisome metrics that could pose a risk to third-quarter results.
1. Slowing Streaming Starts: Netflix's streaming starts were down 22% quarter-over-quarter, Martin said. The company represented only 25% of Reelgood's third-quarter streaming starts, down from 32% in the second quarter.
2. Subscription Fatigue: Ad-based video on demand, or AVOD, picked up share from subscription-based video on demand, or SVOD, in the third quarter, Martin said, citing Reelgood. SVOD, which is Netflix's business model, streams were 47.5% of the total in the third quarter, down from 52.3% in the second quarter.
3. eMarketer's SVOD Forecast Poses Risk: eMarketer's new estimate of 207.5 million U.S. viewers of SVOD for 2020 represents 10 million more SVOD homes subscribing in the U.S. during 2020, the analyst said. With Netflix having already added 12 million SVOD homes, it looks like the company's subscriber numbers are at risk if eMarketer's estimates are correct.
4. Decline In U.S. Subscribers Foreseen For Q3: Netflix will end 2020 at the same 73 million U.S. subscribers it had at the end of the second quarter, she said, citing eMarketer projections. The firm, therefore, expects the company may report lower year-over-year U.S. subscriber numbers and then add subscribers in the fourth quarter to re-achieve second-quarter levels.
5. Netflix Has Matured: Among all connected device owners, 69% said they watched the Netflix app on their connected devices during September, Martin said, citing an InMobi survey.
"By implication, NFLX penetration is mature with more downside risk than upside growth potential, in our view," the analyst wrote in the note.
6. Intensifying Competition: Netflix's competitive landscape has been growing relentlessly, Martin said, citing long-term trend data from Antenna. Therefore, the company's customer acquisition costs are rising, and its churn is under structural upside pressure.
7. Deteriorating Technicals: The technical picture for Netflix shares suggest downside risk. As such, the firm lowered its third-quarter estimates for Netflix.
NFLX Price Action: Netflix shares were down 1.51% to $ 526.58 at publication time.
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