Netflix Earnings Prediction
There is currently a lot of talk and hype around Netflix after their blockbuster release of “Squid Games”. Squid Games has quickly become an international sensation after reaching 111M+ global viewers in more than 200 different countries. Squid games has brought a lot of hype to Netflix (and their original content) and has set the stage for an interesting Q3 2021 earnings report (on October 19th after market close) for their stock investors. Today, I am here to predict how Netflix’s Q3 earnings report will go, and a large part of this will be focusing on the growth of their platform in the past quarter due to their hit show “Squid Games”. At the end of this analysis, you will find NFLX price target, and how I would play this earnings if my figures are correct.
Q2 2021 Earnings Report:
The most important factor that I derived from Netflix’s Q2 2021 financial report is the fact that their weighted average subscription price across all of their regions is $12.26. This will be very important in determining the revenues in Q3 2021.
Furthermore, Netflix’s revenues in Q2 2021 were $7.34B, and their cost of revenues was $4.02B (54.73% of revenues).
Q3 2021 Earnings Estimate:
Revenues:
I am basing Netflix’s revenues off of their previous revenues, plus the new revenues that are brought in by additional subscribers in this quarter.
Firstly, to get the new subscriber figures I decided to take Netflix’s estimate of 3.5M in this quarter for the first 3 months, due to squid games not being added. This resulted in 900k new subscribers per month for the first 3 months, which adds up to 2.7M new subscribers in June, July, and August.
Cost of Revenues:
As previously mentioned, Squid Games is very likely to have increased Netflix’s margins. As a result of this we can conservatively estimate that Netflix’s cost of revenues is 54% of their revenues (as opposed to 54.73% in Q2 2021). By doing this their cost of revenues should be $4.2B
Other Costs:
Assuming that Netflix’s other costs are the same % of revenues as they were in the previous quarter, we can estimate all of these other expenses to total $1.56B.
Operating Income:
If these assumptions are correct, then Netflix’s operating income for Q3 2021 should be $2.01B.
Net Income:
Assuming Netflix’s Net Income to Operating Income ratio is the same (over the past 6 months), we can estimate that Netflix’s Q3 Net Income figure to be $1.25B.
EPS:
Since Netflix has 442.6M shares outstanding, their diluted EPS should be $2.74. This would represent a 7% EPS.
Overall Thoughts:
I think that Netflix is going to narrowly beat earnings, which in theory should be good for the stock. However, since Squid Games was released, the stock has been up 6-7%. As a result, I think that NFLX will not have a big reaction from their earnings. I think that they might open the next trading day (October 20th) up between 0-1% and close the day between -0.5% and +0.5%.
If I am correct, then the best way that I could think to play this via iron condors. I think that a 600/615/635/650 iron condor would be suitable given my estimates. Buying this option would cost $375 which is the maximum downside, and the max profit is $1,125, which represents a 3:1 risk to reward ratio which is good. Furthermore, the probability of profit (based on recent volatility) is 61%. Furthermore, the breakeven prices are $603 and $646. The breakeven price represents my post-earnings price target; however, I think that Netflix will stay within the inner range of $615-635, which would yield a credit of $1,125.
Sources:
Original Analysis
Netflix's 'Squid Game' success shines light on international discounts (cnbc.com)
Netflix, Inc. (NFLX) Analyst Ratings, Estimates & Forecasts - Yahoo Finance
0001065280-21-000250 (d18rn0p25nwr6d.cloudfront.net)
Netflix has raised the cost of subscriptions, even for existing customers – Pledge Times
Netflix adding GST/HST to your bill beginning Canada Day | CTV News
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