• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Stocks

Is Squid Game Success a Buy Signal for Netflix?

Netflix's surprise hit is attracting the eyes of viewers and investors alike.
By KEVIN CURRAN Oct 15, 2021 | 01:02 PM EDT
Stocks quotes in this article: NFLX, AMZN, DIS, CMCSA, AAPL

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.

Awaiting Earnings

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.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Curran had no positions in any securities mentioned.

TAGS: Fundamental Analysis | Investing | Stocks | Trading | Media | Movies | U.S. Equity | Earnings Preview

More from Stocks

Gravity Is Pulling on Apple

Mark Sebastian
May 23, 2022 2:32 PM EDT

Here's where I see AAPL going and how to play it.

Look for General Motors Shares to Restart Their Uptrend

Bruce Kamich
May 23, 2022 2:10 PM EDT

Why aggressive traders could get behind the GM wheel again.

Alibaba Is Sold out on the Downside

Bruce Kamich
May 23, 2022 1:26 PM EDT

China at a bearish extreme is an opportunity.

It 'Bears' Repeating: Tune Out the Noise!

Bob Lang
May 23, 2022 1:16 PM EDT

The noise around the markets is loud, distracting and sometimes obnoxious, but if you listen to it, you'll end up making poor decisions.

I've Got Smith & Wesson in the Holster, but the Safety Switch Stays On

Jonathan Heller
May 23, 2022 12:30 PM EDT

I wouldn't jump the gun on this name, but here's why I find it compelling.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 02:24 PM EDT PAUL PRICE

    An Interesting Chart

    I'm betting heavily that stocks will be way up aga...
  • 10:10 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    "Market Timing for Dummies"
  • 01:44 PM EDT STEPHEN GUILFOYLE

    Stocks Under $10 Portfolio

    We're making a series of trades here.
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login