Netflix, Tesla report earnings, what you should expect next week

(Yahoo Finance) – Earnings season is set to pick up this week, giving investors a better picture of the state of corporate profitability amid the ongoing coronavirus pandemic.

Results from last week were dominated by the big banks, which largely reported better than feared third-quarter results on the back of strong trading revenues and lighter reserve builds relative to the first half of this year.

So far, about 10% of the S&P 500 companies have reported quarterly results. Of these, 86% topped consensus expectations for earnings per share, according to data from FactSet as of Friday. The blended earnings decline for the third quarter – comprising of both actual and expected results – is so far 18.4%, or slightly better than the about 20% earnings drop the Street was bracing for heading into earnings season.

This week, a plethora of companies across industries are set to report results, including more airline carriers like American Airlines (AAL) and Southwest (LUV), consumer giants including Procter & Gamble (PG) and Coca-Cola (KO), and health care companies Biogen (BIIB) and Quest Diagnostics (DGX).

Reports from a couple of 2020’s closely watched tech names are expected to be a particular focal point. Streaming giant Netflix (NFLX) is set to report quarterly earnings results Tuesday after the bell, and Tesla (TSLA) is poised to deliver results late Wednesday.

Netflix, a darling of the stay-at-home trade, has so far added a decelerating number of new subscribers over the course of 2020, following an initial surge in sign-ups during the first wave of stay-in-place orders.

Last quarter, Netflix disappointed investors after saying third-quarter global net subscriber additions would total 2.5 million, representing a major step down from the record performance Netflix posted for the first half of the year. More than 10 million subscribers joined Netflix during the second quarter, and nearly 16 million paying users were brought on during the first.

“We’re expecting paid net adds will be down year-over-year in the second half as our strong first half performance likely pulled forward some demand from the second half of the year,” the company said in its July shareholder update.

Still, Wall Street has interpreted Netflix’s guidance as overly conservative. Consensus analysts are looking for new paid streamers to total 3.3 million, according to Bloomberg data, with the majority of these new users coming from less streaming-saturated geographies including Europe, the Middle East and Africa (EMEA) and the Asia Pacific region. And while subscribers are expected to decelerate sequentially, Netflix’s revenue growth is expected to hold up more robustly, with sales growing 22% over last year to nearly $6.4 billion after a 25% growth rate in the June quarter.

The Netflix logo is pictured on a television in this illustration photograph taken in Encinitas, California, U.S., January 18, 2017.

Netflix’s commentary around its outlook for late-2020 and early-2021 will also be closely watched. For the quarter ending in September, Netflix’s release schedule was somewhat lighter than in quarters prior, with “The Baby-Sitters Club,” “The Last Dance” and the second season of “The Umbrella Academy” among the highlights.

But looking ahead, the threat of a lighter content release schedule looms for Netflix and other streaming companies, with the pandemic and potential for a second wave of the virus having upended studios’ production schedules this year.

“We expect to gain more clarity on the company’s content pipeline and any disruptions caused by pandemic-related production pauses,” Raymond James analysts Andrew Marok and Aaron Kessler, who rate Netflix as Market Perform, wrote in a recent note.

“While we continue to view Netflix as a long-term winner in the video-on-demand space, we remain hesitant around near-term factors including 1) uncertainty around the pace of subscriber additions post-pandemic; 2) the impact of the pandemic on content releases into 2021; and 3) the company’s pricing power as new DTC services compete for market share,” they added.

Tesla’s 425% stock run-up year-to-date has made it the second-best performer in the Nasdaq 100, bested only by Zoom Video Communication’s (ZM) more than 700% gain.

The company’s third-quarter results come after the company reported a record number of deliveries for the three months to September, bucking the trend of the broader auto industry, after most legacy automakers reported another quarter of declines.

Yet, Tesla’s 139,300 third-quarter deliveries still put the company’s previously stated goal of around 500,000 deliveries for 2020 at a stretch, according to most Wall Street analysts. For the year-to-date, Tesla has handed over nearly 319,000 electric vehicles, driven mostly by demand for the lower-priced Model 3 and newer Model Y.

“While we expect Tesla to maintain its target of 500k deliveries in ‘20, we believe it will be hard pressed to reach its target, as it would need to produce near capacity for all of 4Q,” Credit Suisse analyst Dan Levy, who rates Tesla shares as Neutral, said in a note last week. “Yet even if Tesla misses its 500k target, we expected investors to look through it as the longer-term growth narrative is intact.”

Analysts anticipate 2020 volume will be about 486,000, which would still be within the guidance range CEO Elon Musk offered at the company’s shareholder meeting in September. There, Musk said full-year delivery growth would be between 30% to 40% over last year, implying a range of 477,750 to 514,500 cars. But the Street has homed in on that half-million figure, however, after Tesla said at the beginning of the year – but before the start of the pandemic – that deliveries should “comfortably exceed 500,000.”

Investors are also apt to focus on Musk’s discussions Wednesday around Tesla’s newly laid-out goals around manufacturing its own “tabless” batteries in-house, which are set to help reduce the company’s costs and improve the cars’ power and range.

These new batteries are expected to help the company eventually develop a $25,000 electric car, making the price to consumers much more appealing and competitive against the prices of existing combustion-engine vehicles. The new battery technology is not likely to reach mass production until 2022, however.

“Ramping manufacturing will determine success of the battery strategy,” Levy said. “Focus will sharpen on gross margin to see a path on cost improvements, and thus [opportunity] to expand volume via price cuts.”