Netflix (NFLX) Q3 2020 Earnings | a Disappointing Quarter Amid a Broad Miss on Most Expectations

Netflix (NASDAQ:NFLX) reported on Tuesday third quarter earnings missed Wall Street estimates as subscriber growth fell short as pandemic-led demand in earlier quarters faded.

Netflix (NASDAQ:NFLX) fell 5%.

Netflix announced earnings per share of $1.74 on revenue of $6.44 billion. Analysts polled by Investing.com anticipated EPS of $2.13 on revenue of $6.39 billion.

Subscriber numbers grew by 2.2 million during the three months that ended September 30, below its guidance of 2.5 million net adds.

“As we expected, growth has slowed with 2.2m paid net adds in Q3 vs. 6.8m in Q3’19. We think this is primarily due to our record first half results and the pull-forward effect we described in our April and July letters. In the first nine months of 2020, we added 28.1m paid memberships, which exceeds the 27.8m that we added for all of 2019,” the company said.

Netflix’s aggressive spending on content has placed increased scrutiny on its cash burn, but the company upgraded its outlook on cash generation following improved third straight quarter.

Cash generated by operating activities in Q3 was $1.3 billion, compared with a decline of $502 million in the prior year period. Free cash flow, meanwhile, was positive for a third consecutive quarter following an increase of $1.1 billion, compared with a decline of $551 million in Q3 2019. Free cash generation was $2.2 billion year to date, a sharp contrast from the $1.6 billion decline seen in the first nine months of 2019.

“As productions increasingly restart, we expect Q4’20 FCF to be slightly negative and therefore, for the full year 2020, we forecast FCF to be approximately $2 billion, up from our prior expectation of break-even to positive,” the company said.

Looking ahead to the final quarter, Netflix forecast 6.0 million paid net adds, down from 8.8 million the prior year. The streaming giant also acknowledged increased competition after Disney restructured operations to focus more on its streaming business.

“Disney’s recent management reorganization signals that it is embracing the shift to streaming entertainment. We’re thrilled to be competing with Disney and a growing number of other 5 players to entertain people; both consumers and content creators will benefit from our mutual desire to bring the best stories to audiences all over the world,” Netflix said.

As productions increasingly restart, we expect Q4’20 FCF to be slightly negative and therefore, for the full year 2020, we forecast FCF to be approximately $2 billion, up from our prior expectation of break-even to positive.

Netflix is up more than 53% for the year so far, but will likely see near-term pressure, experts said.

“Netflix net additions clearly show that the pandemic-induced boom is tapering off and it will be hard for the company to repeat a similar or better performance next year. In that scenario, there is no reason for its stock to continue its upward journey in the short-run. That said, Netflix continues to remain the dominant player in the streaming business and further strengthening its lead during the pandemic,” Investing.com analyst Haris Anwar said.