By Jon Swartz
Netflix Inc. experienced a bounce in profit and subscriber additions as it found its biggest surprise success yet in the third quarter, but predictions for the holiday season were not as bountiful.
Netflix (NAS:NFLX) on Tuesday reported 4.4 million net new paid subscribers in the third quarter, eclipsing its own forecast (3.5 million) as well as the average analyst forecast of 3.78 million, according to FactSet, and giving the streaming-video service 213.6 million subscribers overall. Executives said they expect 8.5 million new subscribers in the fourth quarter, when new content is set to join Netflix’s biggest original hit yet, “Squid Game,” which would match the performance of last year’s holiday quarter.
The average analyst estimate for fourth-quarter subscriber additions was 8.4 million, but many analysts expected Netflix to surpass that number handily in its guidance Tuesday. Stifel analyst Scott Devitt, for example, said he expected more than 10 million new subscribers in the fourth quarter as Netflix “successfully releases compelling original content, broadens its international penetration, and enters a seasonally favorable period for sub adds.”
The global hit series “Squid Game,” an international megahit estimated to be worth nearly $900 million to the company according to a recent Bloomberg News report, is a major reason for an expected turnaround through the end of the year. Since its Sept. 15 debut, it has been viewed by 142 million member households.
Netflix has maintained a wide subscriber edge in a crowded streaming market that includes rivals Walt Disney Co. (NYS:DIS) , Apple Inc. (NAS:AAPL) , AT&T Inc. (NYS:T) , Comcast Corp. (NAS:CMCSA) , Amazon.com Inc. (NAS:AMZN) and ViacomCBS Inc. (NAS:VIAC) . But with a fresh batch of wildly popular content joining “Squid Game” this quarter, including new seasons of previous hits “The Witcher” and “Tiger King,” Netflix is expected to storm back the rest of the year.
For more: Can ‘Squid Game’ and videogames be game-changers for Netflix?
“After a lighter-than-normal content slate in Q1 and Q2 due to COVID-related production delays in 2020, we are seeing the positive effects of a stronger slate in the second half of the year,” company executives said in a letter to shareholders Tuesday.
“We are in uncharted territory” with a glut of programming, Netflix co-Chief Executive Reed Hastings, said in a video interview following the earnings announcement.
Netflix warned that profitability will likely take a hit from a wave of new programming, which is costly. Company executives forecast earnings of 80 cents a share in the fourth quarter on revenue of $7.71 billion. (Analysts have forecast $1.12 for Q4.)
In the letter, executives called “Squid Game” “our biggest TV show ever.”
“A mind-boggling 142m member households globally have chosen to watch the title in its first four weeks,” they wrote, while adding that they are rushing out merchandise tied to the show. “The breadth of ‘Squid Game’s’ popularity is truly amazing; this show has been ranked as our #1 program in 94 countries (including the U.S.)”
Netflix said it earned $1.45 billion, or $3.19 a share, up from $1.74 a share a year ago and easily topping expectations of $2.57 a share, according to analysts polled by FactSet. Netflix’s revenue catapulted to $7.48 billion, up from $6.44 billion a year ago and matching Street estimates of $7.48 billion.
Netflix shares rose nearly 2% in after-hours trading immediately following the announcement Tuesday, but the gains sank to a loss of 1% as the extended trading session continued. The stock is up 18% so far this year, while the broader S&P 500 index (S&P:SPX) has improved 20% in 2021.
The expectations for fourth-quarter gains doesn’t necessarily mean smooth sailing for Netflix, which faces a torrent of criticism over its defense of comedian Dave Chapelle’s controversial special. Indeed, Netflix employees have planned a virtual walkout.
“Media and technology platforms like Netflix, Facebook (NAS:FB) , and others need to be held accountable for their role in pushing content that promotes hate, homophobia, transphobia, misogyny and harmful stereotypes,” Common Sense CEO James P. Steyer said in a statement mirroring general sentiment about Netflix.
Meanwhile, rival Disney has warned pandemic-related production delays may undercut Disney+ subscriber numbers for the current quarter, prompting Barclays analyst Kannan Venkateshwar to caution the media empire could face “structural” problems in its streaming operations. The analyst on Monday downgraded Disney’s stock to equal-weight from overweight and reduced its price target to $175 from $210 .
“Squid Game” dominated much of the 40-minute video interview with Netflix executives, though the company’s entry into videogaming was touched upon.
Greg Peters, who as chief operating officer and chief product officer oversees the gaming effort, said the initiative will attempt to duplicate the ramp-up of original series and films through self-made game titles, co-ventures with partners, and acquisitions. Last month, Netflix snapped up Night School Studio, developer of narrative-driven titles such as “Oxenfree.”
Developing games in-house will let Netflix “push the edge of interactive storytelling.”