Analyst Raises Netflix EPS Estimate By 50% Ahead Of Q4 Earnings, But Warns 'Valuation Leaves Little Room For Error'

Zinger Key Points
  • Netflix could receive support from the weakening of the dollar in the fourth quarter, KeyBanc analyst says.
  • The firm lifted its Q4 EPS estimate meaningfully above the consensus estimate.

Netflix, Inc. NFLX is scheduled to report its fourth-quarter results Thursday after the market close.

The Netflix Analyst: KeyBanc Capital Markets analyst Justin Patterson maintained a Sector Weight rating on Netflix shares.

The Netflix Thesis: Among the streaming giant's key metrics, churn is returning to normal, gross adds continue to be challenged and viewership is mixed, Patterson said in a note previewing the company’s quarterly results.

Churn fell 0.2% month-over-month in December to 1.8%, in line with historical norms, suggesting the metric is returning to normal, the analyst said. Citing a 2% year-over-year decline in Google search queries globally and a 15% decline in app downloads, according to Apptopia, the analyst said the fourth quarter may have seen a softer gross add environment.

Excluding the series “Wednesday,” which was a hit with 1.2 billion hours streamed in the first 28 days, many shows failed to gain meaningful traction, the analyst noted. This is underlined by about a 1% year-over-year decline in the top 10 content hours viewed per subscriber, he added.

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The quarterly results will get a lift from an improvement in forex conditions since Netflix issued guidance, with the weakening of the dollar against the euro, yen and pound impacting financials, Patterson said.

The analyst raised his fourth-quarter revenue and earnings per share estimate by 2% and 50%, respectively, to $7.96 billion and $0.53. This compares to the consensus estimates for $7.82 billion in revenue and EPS of $0.44.
KeyBanc also hiked its 2023 and 2024 estimates, reflecting higher average revenue per user, primarily due to forex.

“Coupled with the removal of net add guidance and monetization events on the horizon (e.g., ads, password sharing, and likely a 1H23E price increase), we believe there will be little for investors to nitpick on the print,” Patterson said.

The analyst, however, adds a cautionary note due to the recent stock gains. “Valuation leaves little room for error,” he said, while noting that the stock has considerably outperformed media and internet peers since June 30, 2022.

Additionally, Raymond James analysts issued a Q4 preview, expecting paid net subscriber additions of 4.5 million for the quarter (vs. consensus 4.6 million), and revenue of $7.78 billion. For Q1 of 2023, Raymond James anticipates paid net subscriber additions of 1.6 million (vs. consensus 2.6 milllion), and revenue of $8 billion.

Netflix Price Action: Netflix ended Tuesday’s session down 1.98% at $326.22, according to Benzinga Pro data.

Read next: Netflix Said To Be On Acquisition Radar Of This Tech Giant

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Posted In: Analyst ColorEarningsEntertainmentPreviewsReiterationAnalyst RatingsTechTrading IdeasGeneralJustin PattersonKeyBanc Capital Markets
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