In the days leading up to Netflix’s third-quarter earnings on Tuesday, investors were beginning to get edgy (Miles Costello writes). The American-listed streaming giant had already briefed shareholders to expect the record rate of subscriptions growth recorded during the first half to slow during the three months to the end of September and tensions were mounting over what the numbers would look like.
Nevertheless, hopes among some analysts — and plenty of the small investors who hold the stock — remained high.
In the event, Netflix undershot even its own forecasts on subscriber growth over the third quarter, sparking a minor sell-off in the shares and leaving some stockholders rattled. Could it be that this long-running hit show for the stock market is finally drawing to a close, or is it in reality little more than a short intermission?
Netflix was founded in California as a DVD rental service in 1997, before moving into subscription-based streaming a decade later. It has more than 195 million paying subscribers in more than 190 countries. The company is increasingly known for producing its own high-quality films and series, including The Crown, Stranger Things, Red Notice and The Witcher.
The relative shortfall in new subscribers over the third quarter was the main disappointment for investors. Having forecast that 2.5 million more people would take out a membership, and against analysts’ predictions of 3.8 million, in the end only 2.2 million customers signed up during the period.
The group has been a clear beneficiary of the global pandemic, with customers joining in droves worldwide as countries went into lockdown and consumers sought entertainment while stuck at home.
The comparatively lacklustre activity over the most recent quarter meant that Netflix missed analysts’ expectations on profits and its prediction of six million new subscribers during the three months to the end of the year was also below Wall Street’s hopes.
Yet there are interesting twists in this plot and the streamer beat it and the market’s expectations on several other counts. Revenues were higher than it had initially expected, largely because its earnings per user were ahead of its target.
At just over 20 per cent, Netflix’s operating margin was also better than it expected, meanming that its free cashflow at the end of the year is predicted to hit $2 billion, against its initial forecast of at best break-even.
Scepticism about Netflix has been founded on two principal worries. First, the increased strength of the competition, from rivals as diverse as Apple and Amazon to Walt Disney. Second, the billions that Netflix spends producing dramas each year have meant that, despite being respectably profitable, the company has had to make substantial use of the debt markets to find its outlay. Its high use of cash has meant the prospect of a dividend for shareholders looks dim.
Netflix’s third quarter earnings show some encouraging signs in both regards, however. The group made big strides in new markets, including in Asia, suggesting that it has been competing well with rivals and that the lower than expected growth has not been about losing market share.
Its higher than expected cashflows, mainly through efficiency, also mean that it is less reliant on debt funding. Netflix’s long and short-term debts have risen only modestly this year even though it has ramped up its production schedule.
The shares, down $36.37, or 6.9 per cent to $489.05 in New York last night after the results, are very highly rated, trading at just over 84 times this year’s forecast earnings.
Still, this increasingly resilient group is moving in the right direction and the outlook for the shares over the longer run looks strong. Those who disregarded the advice in April should definitely hold on. Those with the appetite for a long-term play might consider buying.
ADVICE Buy
WHY The longer-term outlook for this ever-more efficient and profitable streaming business is strong
Caretech Holdings
Elderly care homes have been ravaged by Covid-19, but the markets for specialist social care and education services for children and adults have been more resilient (Alex Ralph writes). Yesterday, for example, Caretech Holdings said in a trading update for the year to the end of September that its results due in December were set to be ahead of the City’s expectations.
Caretech looks after more than 4,500 people and operates more than 550 sites in Britain, as well as running a small fostering services business. Revenue increased year-on-year in its children’s and adults’ services and was particularly strong in the latter part of the year in its new subsidiary s in the United Arab Emirates, which it acquired in January in its first overseas expansion.
The lower age profile of the group’s residents has made it less vulnerable to Covid-19 interrupting its services. About 800 of its 11,000 staff were off work during the peak of the pandemic in the spring, but all its operational sites have remained open and staff absences have fallen to between 300 and 200. Caretech expects to announce revenue and earnings before tax and other charges “slightly” ahead of market expectations. That prompted analysts to nudge up their forecasts yesterday and pushed up the shares by 12p, or 2.6 per cent, to 470p, extending gains this year to about 5 per cent.
Caretech has accessed emergency funding available via local authorities to “help support the provision of additional resources and associated costs to halt the transmission of Covid-19”. Farouq Sheikh, executive chairman, said that the funding had been used to top-up staff sick pay, to cover the cost of personal protective equipment and for a one-off payment of about £150 on average for staff bonuses.aff “facing adversity”. Caretech — whose net debt fell to £268.9 million, compared with £287.4 million at the end of March — is poised to pay a dividend and to strike more bolt-on deals, after this month’s acquisition of a majority holding in Smartbox, whose technology helps disabled people without speech to live more independently.
ADVICE Buy
WHY Robust trading and scope for bolt-on deals
