TV streaming service Netflix (NASDAQ: NFLX) is due to report its Q2 earnings on Tuesday, July 20.
The streaming market is increasingly saturated, subscriber growth has been waning, and its share price has had a lacklustre few months. So, investors question its long-term viability and whether there’s any short-term upside to investing before the Q2 earnings call.
Underperforming key indices
In the past year, Netflix has underperformed both the S&P 500 and the NASDAQ, lagging the market and industry overall.
Netflix (NASDAQ: NFLX) underperformed the NASDAQ and S&P 500
It has fluctuated along the way and is up 15% from its 52-week low but down 10% from its 52-week high. The Netflix share price is up 1.4% year-to-date.
Unfortunately, Q1 results disappointed shareholders after a hugely successful 2020.
It gained 3.98 million paid subscribers, well below the anticipated 6 million its guidance suggested. Furthermore, this was a 74% decline year-over-year after the pandemic brought an influx of 15.77 million paid subscribers in Q1 2020.
The company guidance suggests global paid subscribers for Q2 will come in around 208.64 million. This is a rise of 8.1% year-over-year and 0.48% over Q1.
And analysts are predicting revenues of around $7.31 billion in Q2, up 18.9% year-over-year.
Throughout the past decade (to December 31, 2020), Netflix averaged around 28% sales growth. In Q1, it saw 24% growth which is not a significant slowdown.
The company also projects breakeven cash flow this year, which is a considerable improvement on its reputation for severe cash burn.
Netflix has a $235 billion market cap, and its forward price-to-earnings ratio is 51.
According to Koyfin data, analyst consensus 12-Month average price target is $592. This gives a potential upside of 11.7%.
Rising competition
While Netflix remains a key player, it faces rising competition from Disney+ (NASDAQ: DIS), Apple TV+ (NASDAQ: AAPL), Amazon Prime (NASDAQ: AMZN), HBO Max, Peacock, and Discovery+ (NASDAQ: DISCA).
Last year saw Netflix add a record 37 million users, blowing its five-year average of 24 million out of the water. However, maintaining that spike is unlikely and, therefore, may temporarily hurt sentiment.
Nevertheless, Netflix is committed to investing heavily in producing domestic and foreign content. It is focused on producing original content with popular releases such as The Queen’s Gambit, Oxygen, Skater Girl, Shadow and Bone, and The Upshaws.
Fear Street, I Think You Should Leave with Tim Robinson, Never Have I Ever, and Money Heist are slated for release in Q3, while Cobra Kai and The Witcher are due in Q4.
Meanwhile, new seasons of Stranger Things, Ozark, The Crown, and Bridgerton are expected next year.
Netflix is now a regular contender at major cinematic awards ceremonies, and its content is in high demand. In fact, it’s received the highest number of Emmy nominations two years running.
While the streaming wars are real, most consumers are willing to subscribe to multiple services. Therefore several key players can continue to lead the way.
Additionally, it is looking to expand into video games, having hired a former EA executive to get the ball rolling. This is a potential gamble, that could pay off handsomely if subscribers value the additional content.
Plenty of room for growth
Netflix is steadily growing its subscriber base in the Asia Pacific region and across Latin America. The company still has a good percentage of the world to conquer, potentially continuing to grow over the long term.
It varies its content region-by-region, which helps keep it relevant and in demand.
Its subscription revenue model gives it leeway to raise more revenue quickly by hiking the price. It also provides a way to retain customers long-term with price reductions for loyalty.
Considering this, Netflix appears to have a strong future ahead and seems a reasonable addition to a long-term investment portfolio.
Morgan Stanley (NYSE: MS) maintains an Overweight rating, with a positive long-term outlook. JP Morgan (NYSE: JPM) is also bullish on its future.
Plus, with virus fears not yet abated, the market for content streaming is likely to remain buoyant for some time.
On the flipside, virus fears suppress the overall markets, which may cause a share price pullback in the near term.
Netflix doesn’t offer a dividend, but its track record and room for continued growth may attract longer-term investors. Traders may want to wait until the Q2 earnings results are out before attempting to make a quick buck.