There is currently a lot of talk and hype around Netflix after their blockbuster release of “Squid Games”. Squid Games has quickly become an international sensation after reaching 111M+ global viewers in more than 200 different countries. Squid games has brought a lot of hype to Netflix (and their original content) and has set the stage for an interesting Q3 2021 earnings report (on October 19th after market close) for their stock investors. Today, I am here to predict how Netflix's Q3 earnings report will go, and a large part of this will be focusing on the growth of their platform in the past quarter due to their hit show “Squid Games”. At the end of this analysis, you will find a NFLX price target, and how I would play this earnings if my figures are correct.
Firstly, as we know, Squid Games had reached over 111M global users in over 200 countries in the past month alone. This in and of itself is impressive, however factoring in their low production cost of $21.4M makes it exponentially more impressive. Squid Games was able to keep these costs low due to filming in South Korea (Internationally) which allows for actors to work longer hours and can bring the cost of production down. Top executives have predicted that the cost to shoot domestically (in Hollywood) would have been 5-10x more than Netflix's cost of production. This series in particular has opened the floodgates for streaming services to shoot internationally, as many of them are now starting to express interest in it.
Squid Games was a huge money maker for Netflix and has been estimated to be worth in the ballpark of $900M, which represents a return on their investment (production) of over 4,100%. Considering Netflix's revenues last quarter were $7.3B, Squid Games is likely to represent a large percentage of their revenues in Q3, and since their margins are so impressive, it is likely that we see Squid Games have a role to play in Netflix having better margins on their upcoming earnings.
The most important factor that I derived from Netflix's Q2 2021 financial report is the fact that their weighted average subscription price across all of their regions is $12.26. This will be very important in determining the revenues in Q3 2021.
Furthermore, Netflix's revenues in Q2 2021 were $7.34B, and their cost of revenues was $4.02B (54.73% of revenues).
I am basing Netflix's revenues off of their previous revenues, plus the new revenues that are brought in by additional subscribers in this quarter.
Firstly, to get the new subscriber figures I decided to take Netflix's estimate of 3.5M in this quarter for the first 3 months, due to squid games not being added. This resulted in 900k new subscribers per month for the first 3 months, which adds up to 2.7M new subscribers in June, July, and August.
Lastly, we needed the new subscribers for the month of September. This was more difficult to calculate as they released Squid Games this month which drove in far more traffic than usual. In order to get a proxy for how many new subscribers a “hit” like Squid Games can bring in, I used the data from Netflix's 2nd biggest show “Bridgerton.” Like Squid Games, Bridgerton was released 1 month prior to their earnings report, and helped Netflix to beat their new subscriber estimates by 41%. However, since squid games is 50% more popular than Bridgerton was in their first month, I think it is reasonable to estimate that Squid Games can help Netflix beat their Q3 2021 new subscriber estimates by 61.5%. Increasing Netflix's Q3 subscriber figures yield 5.65M new subscribers over the whole quarter. This means that in September, Netflix likely brought in 2.95M new subscribers mostly off of the success of Squid Games.
Overall, if Netflix brought in 0.9M subscribers June, their revenue generated for the quarter would be $44.32M (900000*$12.26*4 months). If Netflix brought in 0.9M subscribers in July, their revenues generated for the quarter would be $33.1M (900,000*$12.26*4 months). If Netflix brought in 0.9M subscribers in August, their revenues for the quarter would be $22.07M (900,000*$12.26*2 months). Lastly, if Netflix brought in 2.95M subscribers in September as a result of Squid Games, their quarterly revenues would be $36.16M.
In total, it is reasonable to assume Netflix increased their revenues by $136.22M, bringing their Q3 revenues to $7.48B. However, Netflix has been reported to have increased their prices by $1 in many regions. To be conservative, we can assume a $0.50 increase across all regions, which would result in a 4% increase on average prices. This would then cause Netflix's quarterly revenues to be 4% higher, totalling $7.78B. This would represent earnings beat of 0.28B (or 3.7%).
Cost of Revenues:
As previously mentioned, Squid Games is very likely to have increased Netflix's margins. As a result of this we can conservatively estimate that Netflix's cost of revenues is 54% of their revenues (as opposed to 54.73% in Q2 2021). By doing this their cost of revenues should be $4.2B
Assuming that Netflix's other costs are the same % of revenues as they were in the previous quarter, we can estimate all of these other expenses to total $1.56B.
If these assumptions are correct, then Netflix's operating income for Q3 2021 should be $2.01B.
Assuming Netflix's Net Income to Operating Income ratio is the same (over the past 6 months), we can estimate that Netflix's Q3 Net Income figure to be $1.25B.
Since Netflix has 442.6M shares outstanding, their diluted EPS should be $2.74. This would represent a 7% EPS
I think that Netflix is going to narrowly beat earnings, which in theory should be good for the stock. However, since Squid Games was released, the stock has been up 6-7%. As a result, I think that NFLX will not have a big reaction from their earnings. I think that they might open the next trading day (October 20th) up between 0-1% and close the day between -0.5% and +0.5%.
If I am correct, then the best way that I could think to play this via iron condors. I think that a 600/615/635/650 iron condor would be suitable given my estimates. Buying this option would cost $375 which is the maximum downside, and the max profit is $1,125, which represents a 3:1 risk to reward ratio which is good. Furthermore, the probability of profit (based on recent volatility) is 61%. Furthermore, the breakeven prices are $603 and $646. The breakeven price represents my post-earnings price target; however I think that Netflix will stay within the inner range of $615-635, which would yield a credit of $1,125.