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Netflix adds 4.4M subscribers in Q3, topping estimates

Mark Zgutowicz, Rosenblatt Securities Senior Research Analyst joins the Yahoo Finance Live panel to discuss streaming giant Netflix's latest earnings

Video transcript

ZACK GUZMAN: I want to turn to one name that we have been tracking since we got those results yesterday after the bell. That would be Netflix. And shares moving lower today, as I suppose you could say it was a beat, but unexpectedly, you know, we're not seeing some of the pop as the optimism was there potentially when you look ahead to Q4.

But we'll start with the Q3 numbers we got from Netflix in terms of added subscribers because that's always the number investors watch. The number came in at 4.38 million subscribers in Q3. That was above the expectations of 3.72 million. For Q4, Netflix expected to sign up 8 and 1/2 million customers to wrap up the year. That, too, was above the average estimate of 8.32 million.

Of course, you had a lot of enthusiasm on the earnings call around some of those new shows, including "Squid Games"-- "Squid Game," rather. But for more on what it means for the stock, I want to bring on our next guest here. Mark Zgutowicz joins us, Rosenblatt Securities senior research analyst. And Mark, I've been looking forward to chatting to you because in the earlier hour, we were talking about maybe the upside there for Netflix. You have a price target of 450, which is a bit below where we're at right now. So talk to me about how you interpreted the update we got from Netflix.

MARK ZGUTOWICZ: Yeah, you bet, Zack. And nice to be with you. I would just say, frankly, we thought the results were a bit underwhelming. If you back out what we estimate to be a "Squid Game" contribution in the third quarter of close to a million subs and likely a bit below that in the guide in terms of contribution into 4Q, that growth is actually trending below sort of adjusted pre-COVID level.

So despite the massive, massive success that they had with "Squid Game," which, you know, is up close to 70%, 75%, relative to "Bridgerton," which was its prior most viewed title, we think there was a meaningful contribution in the third quarter and expect to see a modest contribution in the fourth quarter. So-- and I think if you back those out, that just sort of points to an underwhelming report.

I think broadly speaking, this is a tale of two cities here. The bulls are, you know, of the belief that Netflix is going to get back to sort of pre-growth or pre-COVID growth levels, call it in the upper teens, if you will. And then the camp that we're in is that this is really a choppy cyclical story. You've got two markets, the US and LATAM, that are you relatively mature and, frankly, we think are a big part of the growth story going forward. And without growth in those two markets, you know, we expect it to be choppy.

ZACK GUZMAN: Well, that's what's interesting, too. And I was reading through your notes here because you had a note in that about the idea that as they lean into the growth in Asia, to potentially come at the risk of maybe losing the growth back in some of those more mature markets you just mentioned. Of course, we saw last quarter, they actually lost customers in the US and Canada, bounced back this quarter.

But as you see success from, you know, Korea, of course, we're talking about "Squid Game" there, potential, as you call it, English rationing in terms of spend on content for Netflix maybe shifting to some of those non-English native markets. And when you talk about that, I mean, some would look at it as a pro in maybe converting some of that international content to work in all markets. Why is that a potential risk in your eyes?

MARK ZGUTOWICZ: Well, there's two reasons. I think first off, they have a tremendous opportunity in APAC. They're well under penetrated in markets there ex China. So there is a huge opportunity there. We've got to remember that the RPU in APAC is, you know, roughly a third less than their US RPU. So that's an important indicator, and you have to definitely pay attention to that RPU growth as they continue to grow subscribers.

On the other side of that, if you look at US, and speaking to your point about non-English speaking investment, what was, I think, sort of hinted to us on the call is that you're going to see a downshift in their actual cash spent on English titles, which I think speaks to the fact that they're just not seeing the return at the high, high level of spend on US or English-based content, particularly in the US, you know, UCAN, as well as other English speaking countries.

So, once you downtick that, I think you have to expect some further pullback, if you will, in terms of the already sort of tepid growth in UCAN, or US, Canada. So I think that points to potentially a story that becomes not as top line heavy and probably more of a focus on the profitability side of the business. And that's a transition that is tough for every company to make, but I think that's potentially where we're headed.

ZACK GUZMAN: Yeah, when we talk about the $450 price target, I mean, what do you see as maybe the move to get there? You know, if we're talking about, what, a 25% decline or something thereabouts, I mean, is it on valuation? Is it the idea of streaming competition coming in, too? I mean, what is it that gets you closer to $450?

MARK ZGUTOWICZ: Well, we actually weren't that far away from it-- actually close to it after their second quarter miss. So if you recall, they missed their guidance in 1Q and 2Q. And I think ultimately, as we look into the first quarter, second quarter of next year, or specifically, guidance for '22 on the fourth quarter call, I suspect it will be much more tepid than what the Street has in terms of expectations.

There at the Street, broadly speaking, is at roughly 24, 25 million in terms of net adds for 2022. We're about 20% below that. So I think that bar is a bit too high. And I suspect that we'll see some tepid guidance that would bring the stock in on the fourth quarter call.

ZACK GUZMAN: All right, well, we'll see how that all shakes out. For now, though, very much a tale of two different takes on the Netflix earnings. Of course, we'll see what happens moving forward. Marcus Zgutowicz, appreciate you coming on here, Rosenblatt Securities senior research analyst. Thanks again for the time.