Third quarter earnings season kicks off, and Wall Street is tuning in. Anxiously awaiting the quarterly numbers, investors will get more clarity on the extent of COVID-19's impact on fundamentals.
While the U.S. Presidential election and the next pandemic stimulus package have stolen some of the spotlight from the upcoming quarterly reports, analysts have taken a deep dive into the data to gain insights on what might be in store.
According to estimates, S&P 500-listed companies are expected to report earnings of $32.97 per share, down 22% from the prior-year quarter. That said, Refinitiv data indicates that about three-fourths of S&P 500 companies surpassed earnings forecasts during the past four quarters.
Against this backdrop, investor focus has landed squarely on the well-known players gearing up to release earnings results on Tuesday, October 20, namely Netflix and Snap. With the pros from Wall Street outlining how both could fare, we used TipRanks’ database to find out even more. Here is the lowdown.
Streaming giant Netflix has been one of the key beneficiaries of the COVID-19 crisis. However, with the entertainment industry as a whole suffering at the hands of the virus, what does this mean for NFLX’s Q3 earnings release?
Representing Monness, 5-star analyst Brian White told clients, “In our view, Netflix already represented a compelling secular story as more consumers opted for streaming video services and then the COVID-19 crisis disrupted our lives. This crisis has clearly accelerated a natural secular trend that was already playing out.”
As a result, White thinks NFLX will at least meet his Q3 revenue estimate of $6.33 billion, which would reflect 21% year-over-year growth (versus $6.38 billion consensus estimate), and slightly exceed his EPS forecast of $2.09 (compared to the Street’s $2.13 call). Management guided for revenue of $6.327 billion and EPS of $2.09.
When it comes to new subscriber additions, White estimates that the streaming company will see global streaming paid net additions of 2.5 million in Q3, bringing the total to 195.4 million. This is in line with the company’s expectations.
However, going forward, headwinds could be approaching, given that live film production has largely been paused. Therefore, he argues we are “now watching important pillars of an American entertainment institution starting to wobble, the movie theater experience.”
The analyst notes the timing of this “destruction” couldn’t be worse, as the company has established a solid standing in the original content space. “Sitting inside a dark, indoor movie theater with strangers during a pandemic is not most people’s idea of a good time. Moreover, this experience is more expensive and time consuming. As a result, studios are increasingly opting to hold back the release of new, blockbuster films,” White explained.
To this end, the analyst expects Q3 sales to gain 3% year-over-year, but to also land below the four-year average of 6% for past September quarters. For Q4, he is projecting sales of $6.45 billion, an 18% year-over-year increase (versus Street’s forecast of $6.58 billion), and EPS of $1.17 (versus $0.95 consensus estimate).
In line with his optimistic approach, White stayed with the bulls, reiterating a Buy rating and $600 price target. Investors could be pocketing a gain of 13%, should this target be met in the twelve months ahead. (To watch White’s track record, click here)
Most other analysts echo White’s sentiment. 19 Buys, 4 Holds and 3 Sells add up to a Moderate Buy consensus rating. Given the average price target of $564.83, the upside potential comes in at 6%. (See Netflix stock analysis on TipRanks)
Going into its Q3 earnings release, expectations for Snap are high out on Wall Street. That said, one analyst thinks the social media company is up to the challenge.
Five-star analyst John Egbert, of Stifel, noted, “The setup for Snap in Q3 appears favorable as the advertising market has meaningfully recovered from its trough in April; while large segments of the ad market (e.g. travel, retail) are still operating well below pre-COVID ad spend levels, digital media channels like Snap are benefiting from robust demand from eCommerce advertisers and gradually improving trends among brand advertisers following the return of live sports and entertainment in recent months.”
Based on positive signals from third-party advertisers and agencies since August, the revenue growth rate implied by Snap's investment plans for Q3 (20% year-over-year) could prove conservative, in Egbert’s opinion.
To this end, Egbert projects revenue growth of 23% year-over-year in Q3, putting the figure at $550 million. This is in line with the consensus estimate and represents an acceleration from Q2’s 17% year-over-year gain. In Q2, SNAP was hampered by severely suppressed ad demand during the early months of COVID-19.
As for DAUs, SNAP faces a tough year-over-year comparison for net additions this quarter. In Q3 2019, the launch of Snap Games and the next-generation AR lenses helped the company add over 7 million DAUs. “We expect Snap to add 6 million-plus net DAUs in Q3 2020, at the high-end of the company's 4-6 million outlook, driven largely by the fast-growing Rest of World segment (which likely benefited from the shutdown of TikTok in India). Insights from Snap’s Ad Manager and various third-party analytics firms appear to support our forecasts,” Egbert mentioned.
On the advertising front, Egbert is optimistic even though there has been a “thin” feature film slate in recent months. Based on data from large agencies and advertisers, directional trends in the ad market have been largely positive since August.
The analyst added, “We believe Snap should be a major beneficiary of growing demand from direct response advertisers during the holiday shopping season, while the company's audience growth, product innovation, and long runway for above-market ad growth should fuel robust levels of growth in FY21 and beyond.”
Everything that SNAP has going for it convinced Egbert to reiterate his Buy rating. In addition to the call, he lifted the price target, with it now clocking in at $32. This target suggests 11% upside potential. (To watch Egbert’s track record, click here)
What does the rest of the Street have to say? SNAP’s Moderate Buy consensus rating breaks down into 22 Buys, 6 Holds and 1 Sell. Given the $29.09 average price target, shares could rise 1% in the next year. (See Snap stock analysis on TipRanks)
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