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Netflix Disappoints: ETFs in Focus

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Netflix (NFLX - Free Report) , the world's largest video streaming company, disappointed investors with its third-quarter results. The company registered its weakest subscriber gains in four years as pandemic restrictions eased, streaming competition increased, and live sports events returned to television. Though Netflix beat revenue estimates, it lagged on earnings.

The dismal result has pushed Netflix shares down as much as 7.4% in after-market hours.

Netflix Q3 Earnings in Detail

The company reported earnings per share of $1.74, falling short of the Zacks Consensus Estimate by 39 cents but improved from the year-ago earnings of $1.47. Revenues climbed 22.7% year over year to $6.44 billion and came in above the Zacks Consensus Estimate of $6.39 billion.

Netflix added just 2.2 million new subscribers globally in the third quarter, down from 6.8 million additions seen in the year-ago quarter and the company’s own conservative guidance of 2.5 million. Netflix now has 195.1 million paid subscribers worldwide, up 23% year over year. This represents the weakest third-quarter gain since 2015, when the company was not operating in most of the world. Subscriber growth has decelerated following a strong surge in sign-ups in the first half of 2020 during the pandemic. The streaming giant has added 25.9 million customers in the first half of the year, marking its strongest start ever (read: ETFs to Win From the Netflix, Amazon Q3 Earnings Faceoff).

Movies and documentaries were the bright spot in the quarter. The most-popular film was The Old Guard — an action film starring Charlize Theron — which has garnered 78 million subscribers in the first four weeks of release. Romantic comedy The Kissing Booth 2 received strong reception with 66 million members watching in the first 28 days. The action film Project Power was also one of the hit movies with 75 million members in the first four weeks. Original content, including new seasons of The Umbrella Academy and Lucifer, garnered 43 million and 38 million households, respectively, to watch these titles in the first 28 days.

The first and second most watched documentary feature films ever — American Murder: The Family Next Door and The Social Dilemma — released in September, is on pace to be the service’s most-watched documentary ever.

Netflix restarted production on some of the biggest titles including season four of Stranger Things, action film Red Notice and The Witcher season two. In addition to the recently released The Haunting of Bly Manor, season one of Emily in Paris and Adam Sandler’s latest film Hubie Halloween, other notable Q4 titles include animated family film Over the Moon from legendary creator Glen Keane, season four of the award-winning series The Crown and the first season of Selena.

Netflix expects number of original contents launch to be up year over year in each quarter of 2021. Some of these are season 3 of Cobra Kai premiering exclusively on Netflix on Jan 8, 2021. The company has a great slate of films, including The Midnight Sky, Hillbilly Elegy, Ma Rainey’s Black Bottom, The Christmas Chronicles 2, Jingle Jangle: A Christmas Journey, MANK and Ryan Murphy’s The Prom.

For the fourth quarter, Netflix expects to add 6 million new subscribers worldwide. With this addition guidance, the company is on pace to add 34 million subscribers in 2020, its strongest year of growth ever, and surpass 200 million customers in total (see: all the Technology ETFs here).

Netflix’s revenues and earnings per share are expected to be $6.57 billion and $1.35, respectively for the ongoing quarter. The Zacks Consensus Estimate is pegged at $6.58 billion for revenues and $1.02 for earnings per share. The stock currently has a Zacks Rank #3 (Hold) and a Growth Score of B. However, the stock belongs to favorable Zacks industry (placed at the top 42% of 250+ industries).

ETFs in Focus

The weak result has put the ETFs with a higher allocation to Netflix in focus. We have highlighted them below:

MicroSectors FANG+ ETN (FNGS - Free Report)

This ETN is linked to the performance of the NYSE FANG+ Index, which is an equal-dollar weighted index, designed to provide exposure to a group of highly traded growth stocks of next-generation technology and tech-enabled companies. It holds 10 stocks in its basket in equal proportion, with Netflix share coming in at 10%. The product has accumulated $56 million in its asset base and charges 58 bps in annual fees. It trades in good volume of 114,000 shares a day on average and has a Zacks ETF Rank #3 (Hold) (read: ETFs to Win From the Netflix, Amazon Q3 Earnings Faceoff).

Multifactor Media and Communications ETF

This ETF targets a wide range of U.S. media and communication stocks to exploit the sector's opportunities by tracking the John Hancock Dimensional Media and Communications Index. It holds 49 stocks in its basket, with NFLX taking the second spot at 6.2% share. JHCS has managed assets worth $25.8 million and charges 40 bps in annual fees. It trades in average daily volume of around 3,000 shares.

Pacer BioThreat Strategy ETF VIRS

This fund seeks to invest in U.S.-listed companies whose products or services help to protect against, endure or recover from biological threats to human health. It tracks the LifeSci BioThreat Strategy Index, holding 46 stocks in its basket. Netflix occupies the third position with 6% of assets. The ETF has accumulated $5.5 million in its asset base and charges 70 bps in annual fees. It trades in a paltry average daily volume of 3,000 shares.

Invesco Dynamic Media ETF (PBS - Free Report)

This fund provides exposure to companies engaged in the development, production, sale and distribution of goods or services used in the media industry by tracking the Dynamic Media Intellidex Index. It holds 32 stocks in the basket with Netflix taking the fourth position at 5% allocation. The product has been able to manage $36.1 million in its asset base while sees a lower volume of about 5,000 shares a day. It has 0.63% in expense ratio and a Zacks ETF Rank #3 with a Medium risk outlook.

First Trust Dow Jones Internet Index (FDN - Free Report)

This is one of the most-popular and liquid ETFs in the broader tech space with AUM of $10 billion and average daily volume of around 645,000 shares. The fund tracks the Dow Jones Internet Composite Index and charges 52 bps in fees per year. Holding 42 stocks in its basket, Netflix occupies the third spot at 5.1%. The product has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook (read: Internet ETFs Are Hot Picks Amid the Coronavirus Crisis).

ERShares Entrepreneur 30 ETF (ENTR - Free Report)

This fund offers exposure to U.S. large-cap entrepreneurial companies with the highest market capitalization and composite scores based on six criteria. This can be easily done by tracking the Entrepreneur 30 Index. Holding 30 stocks in its basket, Netflix occupies the fifth position at 4.8% share. ENTR has accumulated $140.8 million in AUM. It charges 49 bps in annual fees and trades in lower volume of 7,000 shares a day on average.

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