US

Netflix Earnings: Can Squid Game help produce some ink-redible results?

Luke Suddards
Luke Suddards
Research Strategist
Oct 18, 2021
Netflix is one of the most volatile stocks around (6.3% average move up or down around earnings releases). This is a good thing as it provides trading opportunities in both directions. Let's have a look below to find out more.

Netflix is one of the sexiest stocks in the tech space. It’s a service which finds its way into most people’s lives. Share prices move based on both the macro landscape and company specific drivers. Beginning with the macro side of things, there are two key macroeconomic variables which will affect Netflix. Firstly, with a US 10-year yield which continues to climb it will be a headwind for Netflix. Those high growth cash flows will be discounted at a higher rate, lowering its present share price. The second key factor is what the dollar tends do given Netflix’s global source of revenues. The dollar has been in an uptrend but looking at the beginning of Q3 and the end of Q3, the dollar was pretty much flat with rallies and declines along the way. So this shouldn’t pose as a problem in Q3, but Q4 could see some FX effects filtering through into the results. Lastly, the risk-sentiment prevailing in the market can drag down Netflix despite producing robust earnings – this is known as market risk which affects all stocks.

We know how important subscriber additions are for the market and consequently the volatility it causes in the share price. On this front analysts are expecting 3.63mln new subscribers, coming in above Netflix’s own estimates of 3.5mln. If guidance is strong off the back of new content and Squid Games and comes in higher than market expectations then Netflix may seem some solid bids hit. Speaking of Squid Game, it has really been a big boost to Netflix’s share price of recent and for good reason – estimates are that it will generate close to $900mln in value with a cost to produce of only $21.4mln (not a bad return on investment). However, this could also work against the streaming giant as expectations are rather lofty with room for disappointment. I’ll also be keeping an eye on their cash flow situation and how they foresee that playing out. Furthermore, it would a positive sign if the decline in last quarter’s US and Canada subscribers reversed and we saw some growth in these mature markets.

Some other exciting company news in the pipeline – 1) New merchandising opportunities by partnering up with Walmart 2) The acquisition of a gaming developer called Night School Studio to provide content for subscribers at no additional cost. 3) The purchase to the rights of Roald Dahl’s stories 4) Chatter about entering sports streaming with the CEO recently commenting that he would consider bidding for Formula 1 sports rights.

(Source: Tradingview - Past performance is not indicative of future performance)

Since mid-August Netflix's shares have been on a tear. Price is now quite well above its 50-day SMA and 200-day SMA too. Although, price isn't excessively overbought on the RSI measure. In terms of targets, the 7 October high at $646.84 would be my first score on the door and then past there the round number of $650. On the downside, with a poor result and market disappointment, look towards the 21-day EMA around the $615 horizontal support. On a deeper sell-off there is the $600 support and $575-578 (around the 50-day SMA).

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