Netflix (NFLX) is often lampooned for its proclivity to produce as many shows as possible, prioritizing the quantity rather than the quality of content on its platform. But, when it produces a hit, it is arguably able to capture more attention than just about any studio out there.
This is most certainly the case for Squid Game, as more than 111 million viewers have now tuned into the South Korean hit only about a month after its release. In this instance, perhaps more throws at the dartboard is a strong way to find the bullseye.
"If 'Squid Game' is any indicator, content is still king," Baird analyst Will Power wrote in a recent note to clients. "We had expected a stronger second-half content slate to benefit subscriber growth, which we believe is playing out."
He, along with analysts at Keybanc, Credit Suisse, and more, have been keen to raise price targets and reiterate "Buy" ratings on the stock in the wake of the surprise hit.
Peeking Into a Precedent
Yet, whether one can go along with the bullish analysts rerating the stock depends on just how indicative one series is of Netflix's content overall. As such, it might be best to view some precedent, the best of which was likely the massive success of the streaming leader's 2018 release, Bird Box.
In just the first week of its release, 45 million viewers tuned in to watch Sandra Bullock in a blindfold. After this rapid success that spawned many a meme, the stock jolted to a blockbuster start to 2019, charting an over 30% gain within the first two weeks of the year.
However, after that point and a vote of confidence from many analysts and investors, the stock treaded water for much of the rest of the year and did not start to trend higher than the post-Bird Box boom until Covid hit in early 2020.
In fact, it would be a mediocre earnings release and a price hike in January 2019 that quickly reeled in soaring expectations and removed the blindfold of the most bullish investors.
The former catalyst was a cause for concern as subscriber numbers were not quite as strong as many analysts expected and, as has been the main issue for many years, debt levels remained elevated. Perhaps most importantly, the optimism from Bird Box and sudden jump in the stock price led to a a further inflation of an already sizable earnings multiple. In short, only a blockbuster earnings release was going to be able to satisfy such an overwhelmingly optimistic investor base and, at the time, Netflix was not able to come in over that bar.
Given another earnings release is approaching on Tuesday, Oct. 17, the situation appears eerily similar.
While Netflix is no stranger to touting a stratospheric valuation in both price-to-sales and price-to-earnings terms, a closer focus on its pivot to profitability and balance sheet management is likely to make these metrics more important on Tuesday evening. Additionally, stronger competition from Amazon (AMZN) , Disney (DIS) , Comcast (CMCSA) , Apple (AAPL) , and more constrains the company's growth prospects.
As such, Empire Financial Research analyst Berna Barshay advised that the stock may be running slightly hot into earnings and both an elevated valuation and tough comps might be setting up investors for an earnings-day disappointment.
"This is a particularly low visibility earnings, especially since it was a surprise last quarter in their loss of subscribers in North America," she said. "I'm just not compelled to buy the stock ahead of the earnings."
In her view, a price-to-sales ratio over 10 is just too expensive to gamble on ahead of earnings.
Eyeing International Acceleration
To be sure, a major driver of the presently elevated valuation is the headline-grabbing success of Squid Game and its indication as to Netflix's potential competitive advantage in international markets.
Judging purely by population and the emergence of a consumer class, the Asia Pacific region is perhaps the greatest opportunity for each streaming service. Homing in on spending habits, the average online spend of this growing base of consumers has more than doubled in just the past four years. Additionally, Asian consumers are among the most acclimated to stay-at-home habits that streaming platforms have become part and parcel of.
"The disruption caused in people's daily lives with Covid-19-related restrictions and home seclusion has led to an increase in daily, at-home occasions," a data report from Euromonitor International reads. "Longer than anticipated periods of home isolation and pent up demand for out of home experiences have put hometainment at the heart of newly-formed routines and consumer habits in the Asia Pacific."
At present, market data firm Insider Intelligence indicates that while Netflix touts about 70 million subscribers in both the North American and EMEA regions, its user base in Asia is only about half that. As such, it is easily its largest untapped opportunity. By providing hit new series in local languages, Netflix arguably has a leg up on its closest competitors that remain mainly focused on North America-focused, English-language productions.
Indeed, Netflix already derives about half of its revenue from outside North America despite the under-addressed Asian opportunity. Thus, branching out to these audiences seems a no-brainer.
"They are definitely bumping into a ceiling in North America, so their growth is going to have to come from international markets," Barshay commented. "There is a huge depth of talent in terms of writers, directors, and actors in markets [outside the U.S. and U.K.]. Great storytelling is often universal."
She remarked that this trend indicates the long-term view of Netflix executives on international saturation, which has proved prescient.
Still, whether that long-term planning will prove enough to push the numbers over the bar set by analysts on Tuesday is a tale yet to be told. In this case, perhaps waiting for the print is the best way for investors to feel more confident in finding an entry point.