Netflix Unlocks Growth in Lockdown

Competition was getting tough in the online streaming space, but the pandemic and lockdown has helped Netflix (NASDAQ: NFLX) surge ahead of its competitors. It reported a strong quarter but expects slower quarters ahead.

Netflix’s Financials

Netflix’s Q2 revenues grew 25% over the year to $6.15 billion, ahead of the Street’s forecast of $6.08 billion. GAAP net income increased 165% to $720 million. Non-GAAP EPS was $1.59, which missed the analyst estimates of $1.84.

In the first half of this year, Netflix added 26 million paid memberships, compared to 28 million in all of 2019. Its global streaming subscriptions grew 27.3% in Q2 to 192.95 million, surpassing its earlier estimate of 190.36 million global subscribers. It added 10.09 million paid users during the quarter versus 2.7 million a year ago. Streaming ARPU increased 0.4%. Excluding a -$289 million impact from foreign exchange, streaming ARPU grew 5%.

However, Netflix expects that the rest of the year will not be as strong. For the third quarter, Netflix forecast earnings of $2.09 per share on revenue of $6.33 billion. The market was looking for EPS of $2 on revenue of $6.39 billion. It expects to grow to 195.45 million global subscribers by the end of the current quarter compared to analyst estimates of 198.22 million.

In April, Netflix raised $1 billion of debt and ended Q2 with more than $7 billion of cash and cash equivalents. The company also announced that longtime chief content officer Ted Sarandos would join CEO Reed Hastings as co-CEO.

Netflix’s Competition and Content Strategy

Competition in the streaming industry has never been tougher with entertainment stalwarts like WarnerMedia, Disney and NBCUniversal and tech giants Apple and Amazon pushing their own streaming services. But Netflix has been unfazed by it so far. What’s working for it is a seemingly endless stream of original shows and movies.

The main competitors for Netflix are Amazon Prime Video and Disney Plus, which includes Hulu and ESPN. Amazon has over 150 million subscribers while Disney Plus has over 54 million members. In November, when Disney Plus launched it had forecast 60-90 million subscribers by 2024.

Clearly, the pandemic is helping streaming platforms increase their subscriber base, but the shelter-in-place orders are leading to programming delays. To boost its content offerings, Netflix has acquired rights to Aaron Sorkin’s The Trial of the Chicago 7 and the global streaming rights, of The Spongebob Movie: Sponge on the Run. Netflix has a long production lead time and its lineup for 2020 is not expected to be affected but could affect 2021 plans. On the other hand, its competitors are struggling to keep up.

Netflix is slowly resuming productions in many parts of the world. In Asia Pacific, it is now shooting live action series like season 2 of its Japanese original The Naked Director. In EMEA, it has started production in many countries, including Germany, France, Spain, Poland, Italy, and the UK. It recently resumed production on two films in California and two stop-motion animation projects in Oregon.

The market was disappointed with the weak guidance. Its stock is trading at $492.99 with a market capitalization of $216.8 billion. It hit a 52-week high of $575.37 earlier this month and a 52-week low of $252.28 in September last year.