The Squid Game is a surprise hit for Netflix

The Squid Game is a surprise hit for Netflix

Netflix Reveals Quarterly Financial Results:

• Revenue for the quarter increased by 16% up to the mark in $7,48 billion, which turned out to be at the level of expectations.

• Net earnings per share amounted to $3,19 (on $0,63 above expectations).

• During the quarter, the number of paid subscribers to the service increased by 4,38 million, which turned out to be higher than the management's forecast in 1,54 million and consensus forecast in 3,5 million. The number of subscribers at the end of the quarter was 213,5 million. Added to the US and Canada 70 thousand. new subscribers, in Europe — 1,8 million, in Latin America - 0,3 million, in Asia - 2,2 million.

• Revenue per user increased by 10%, in Europe at 7%, in Latin America at 8% and in Asia for 4%.

Besides, management provided a forecast for 4 kV. 2021G. According to it, revenue is expected to be $7,71 billion (consensus $7,68 billion). Management expects, what the 4 kV. will be added 8,5 million new subscribers (consensus expected $8,32 million).

In our opinion, reporting positive, but quite expected given the success of recent releases of the series. Revenue for the quarter increased by 16%, out of which 8% percent accounted for the growth of subscribers (+4,5 million), and the rest for revenue growth per user. By region, the main growth of subscribers was due to Asia (+2,2 million subscribers) and here the release of the series "The Squid Game" became a clear driver, which looked 142 million households (behind 4 weeks from release) and this is an absolute record. The previous maximum was the film "Evacuation" with Chris Hemsworth (99 million households) and the first season of The Bridgertons (82 million).

At the same time, we have seen strong growth since the second half of August in the shares of the company (+23%), which we associate with the content release schedule, more precisely with expectations for the release of content within this schedule. When it comes to media and streaming companies, then we see exactly schedule content release as the main growth driver for the shares of such companies in the foreseeable future. In this case, the release of continuations of one of the most popular series of the company ("Paper house", Sex Education and Lucifer) in September became the starting drivers for the growth in the number of subscribers, which led to an increase in stocks a few weeks earlier on the expectations of these releases. If the popularity of these series was quite expected, then such a high success of the "Squid Game" came as a surprise to many investment houses, which led to an increase in target prices and became an additional driver for the growth of shares.

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Although the number of new subscribers (the most important indicator of the company) and exceeded management expectations, it was close to consensus forecast expectations, therefore, we did not see a significant positive dynamics of shares based on the results of reporting. In the same time, based on geographic breakdown of new users, the success of the "Squid Game" managed to affect only the Asian region, which is quite understandable, since the series came out 17 September and gained popularity within a few weeks, and in the US and Europe peak views, in our opinion, will be in October. The dynamics of shares until the end of the year will be determined by the release schedule, since not all new subscribers can stay after watching this series.

As part of this schedule of series, we single out the second season of The Witcher as a potential driver of influx and retention of new users (17 December; watched the first season 76 million households — 3 place among service series), the second part of the final season of the series "The Paper House" (3 December; the fourth season looked 65 million households – 6 a place) and the second season of "Emily in Paris" (22 December; 58 million and 10 a place). Besides, in 4 kV. a number of potential blockbuster films are expected to be released on the service. Among them is "Red Notice" with Duane Johnson and Gal Gadot (12 november), "Don't Look Up" with an undeniably stellar cast (24 December, Leonardo DiCaprio, Meryl Streep, Jennifer Lawrence and Timothée Chalamet), prequel to Zack Snyder's movie "Army of the Dead" - "Army of Thieves" (29 October) and much more. Given the release schedule for TV series and films, we see an opportunity for significant growth in subscribers in 4 kV. and high probability of beating the consensus forecast (8,3 million) and management forecast (8,5 million), That, by the way, are at the level 4 kV. 2020G., although the release schedule was less crowded then.

Despite the uncertainty about the further spread of COVID-19, we do not see any significant obstacles to the release of content in the next six months. We will also mark another driver for the next year, a partnership agreement with Sony, which implies the emergence of new films from Sony (with 2022 G.) on the Netflix service at the end of the exclusive theater window. On 21 January is scheduled for release in theaters of the film "Morbius", for the February release of the film "Uncharted", based on the Sony Playstation game of the same name, and for October 2022 G. the continuation of the cartoon "Spider-Man: through the universes".

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Besides, we see prospects in the development of video games, but so far there has not been much more information on this. 28 September, the company announced the acquisition of mobile game developer Night School Studio, famous for the game Oxenfree, issued in 2016 year in the genre of "adventure game". Deal details not disclosed. A very small acquisition for Netflix, but definitely the first significant step into the development segment video games. Other destinations worth noting, that the company, in partnership with Walmart, will sell goods and clothing with the symbols of the most popular series of the service.

Taking into account the reporting, we like the long-term investment attractiveness of the service, but at the moment, the price has already taken into account all the last positive, and in the near future we can see the fixation of positions on the background of reporting, which could create more interesting price levels for a long-term investment in the company's stock ahead of a busy schedule of new releases. As a result, we downgrade the recommendation from BUY to HOLD, but raise the target price from $619 to $678 to the investment horizon 1 year on the back of an increase in the forecast for the growth of the number of subscribers and revenue per subscriber.

Denis Buivolov, analyst at BCS World of Investments

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