For Battered Entertainment Sector,Netflix Q2 Results Will Be COVID-19 Bellwether


When Netflix reports second-quarter results on July 16, kicking off earnings season in the media sector, its subscriber tally and other numbers will offer an initial gauge of how COVID-19 has redrawn the industry map.

Wall Street analysts in recent days have also speculated that another round of solid results could set the company up to be able to more easily raise prices in 2021 or 2022. Investors continue to believe Netflix has room to run, pushing its shares to an all-time high past $492 last Thursday before they closed at $476.89. The stock has gained more than 45% in 2020 to date.

In April, the company blew away all estimates for subscriber growth, adding nearly 16 million subscribers globally during the period ending March 31, to reach almost 183 million. CEO Reed Hastings said he considered the increase in the month of March alone, paced by buzzy titles like Tiger King, as a “pull-forward for the rest of the year” in terms of subscriber targets.

The second quarter, often a stumbling block for the company, this year will capture an April-to-June period when a big chunk of the world was contending with stay-at-home orders due to the pandemic. Titles premiering on Netflix in the quarter include a fourth season of Money Heist, action film Extraction and splashy new projects from Spike Lee, Will Farrell and Jerry Seinfeld.

The official internal forecast is for a gain of more than 7 million subscribers, to a total of 190.4 million, though Hastings described the estimate as “mostly guesswork” due to coronavirus and pandemic factors. In recent weeks, initially hard-hit spots like New York and New Jersey made more strides toward full reopening. California, Florida, Texas and other parts of the U.S. have seen infection rates climb, forcing the closure of some re-opened businesses. That same push-and-pull exists globally, with Italy and the UK leaving the darkest shadows of the virus even as Brazil and India see big spikes.

Netflix has feasted as its traditional media rivals have suffered from the loss of live sports, a massive pullback by advertisers and the shuttering of theme parks and movie theaters. While the halt in film and TV production affected all players, Netflix was able to turn the lights back on in places like Iceland and South Korea at a time when Hollywood, Georgia and New York were still completely paralyzed. It also has enough volume, with hundreds of original shows, that the impact may only materialize in future years, if then.

Just after Netflix’s report, AT&T, Comcast, Disney and others will take their turn revealing the state of their companies to investors. With zero theatrical movie revenue and likely double-digit declines in advertising, it could be a rough go in the spotlight, even if better days could be ahead in the quarters to come.

Wall Street analysts see the trends for Netflix in 2020, especially customer loyalty, setting the company up to raise prices in many territories in 2021 and beyond. (Its last U.S. increase came in early 2019.) Pricing has been a consistent subject of debate. While Netflix has continued to grow even after periodic price hikes, some skeptics wonder how many more increases it can implement without risking a backlash.

Asked about pricing on the company’s last earnings call in April, Chief Product Officer Greg Peters said the company was “not even thinking about price increases” as COVID-19’s impact was “dominating our thoughts and our considerations. We just want to stay super-focused at this point in time on making sure we’re continuing to be there, have a great service, make sure we’re able to provide entertainment and escape for our members around the world.”

Todd Juenger of Bernstein Research, who rates Netflix stock “outperform” sees a lot of upside on price.

“The increased engagement and appreciation for Netflix that a growing number of consumers are
experiencing in 2020 could make it that much easier for Netflix to successfully pass through pricing increases in 2021-22,” he wrote in a note to clients last Thursday.

Using what he waggishly described as “a VPN and brute force,” Juenger said his team sought to assess the global footprint and determine pricing changes. Only Chile and Mexico saw price increases, the analyst determined. Despite huge upticks in engagement and new customers, he believes the economic downturn makes price hikes in 2020 unlikely.

John Blackledge of Cowen & Co. wrote in a client note last week that the result of the firm’s proprietary second-quarter customer survey “implies rising pricing power and Netflix’s leadership on TV screens.”

With COVID-19 dominating the 2020 landscape, Blackledge wrote, “we aren’t surprised that Netflix would gain pricing power as it becomes a more essential entertainment service, and our survey data supports this thesis. While we don’t expect Netflix to raise prices this year, increased pricing power leaves the company well positioned into ’21 and beyond.”

The closely tracked metric of ARPU (average revenue per user) increased 9.5% a year for the past five years at Netflix, Blackledge added, as viewers become more engaged. Cowen’s survey found that 55% of respondents in May 2020 said they would be willing to pay more than they currently do for Netflix, up from 47% in December 2019. Among the heaviest users, those streaming more than seven hours a week of Netflix, the willingness to pay more hit 60% of subscribers, up from 52% last December.

In Juenger’s view, “worse macro conditions are always a risk in the sense that they reduce purchasing power (or at least intention). However, they also tend to increase available free time (especially for those who find themselves unemployed), and increase the need for a means for consumers to ‘escape’ (like, say, binge-ing Ozark).”

During the financial crisis of 2008 and 2009, he added, cord-cutting was virtually non-existent. In the future, “Netflix will become the service that behaves as a ‘staple,’ untouchable in consumer’s core discretionary budget. (We think pay-TV, on the other hand, will face a ‘cliff event’ of increased cord-cutting).”

The direction of the overall economy, of course, will play a role in determining the company’s fortunes.

If the current, pandemic-prompted recession turns into a multi-year, “classical” recession, that could create uncertainty for Netflix, particularly in Asia, Juenger asserted. Netflix is “less engrained and consumer discretionary income is lower” in Asia than elsewhere, he wrote.

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