Netflix Q1 Earnings On Tap Amid Rising Competition in Streaming

As it prepares to report Q1 earnings, Netflix faces rising competition from companies like Disney (DIS) and Apple (AAPL), which are launching their own streaming services.

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With an onslaught of new competition in the streaming services, dominant player Netflix (NFLX) has more than just kept its head above water so far this year—it’s outperformed, at least from a market perspective. Whether the company can outperform new rivals in the long run from a business perspective is another question.

NFLX’s quarterly report is on tap for after the closing bell today, and it may reveal more tempered numbers than it has in recent quarters, if the company’s guidance and Wall Street analyst expectations are any indication.

Like its FAANG counterparts—Facebook (FB), Apple (AAPL), Amazon (AMZN) and Google parent Alphabet (GOOGL)—NFLX shares have been on quite a rip this year, and shares show few signs of slowing. Year to date, NFLX is up nearly 37%, as of April 11, compared to the S&P 500’s 15% rise and the Nasdaq’s 20% rise.

Competition in Streaming Services is Heating Up

For years, NFLX has grappled with rising competition. Companies like Amazon.com (AMZN), with its Prime video service, and Hulu, with its bank of television programs, have claimed many of the “cord-cutters,” or viewers ditching cable for cheaper or more customized offerings.

This year, the number of NFLX rivals continues to grow as major media and technology companies are jockeying for viewers’ attention. In late March, AAPL announced two streaming services that will contend with NFLX, though it hasn’t released prices yet. The first, called Apple TV Channels, will feature content from the likes of Showtime and HBO. The second service will showcase original content from Apple itself.

Walt Disney Co. (DIS) also seems to be in high-gear with trying to claim its share of streaming market with its Disney+ service set to launch Nov. 12, including content from the Star Wars and Marvel lines. With the start of this service, which will reportedly have about 500 movies and thousands of episodes of television shows, DIS plans to pull its content from NFLX. Its price point, at $6.99 per month or $69.99 for a year, appears to aim to undercut NFLX.

Even NBCUniversal, owned by Comcast (CMCSA), apparently has a streaming service in the works, which it said it plans to launch in 2020. One version is scheduled to be free, supported by ads,  and could potentially  attract NFLX customers who are price conscious. NBC’s other streaming option is designed to be ad-free and will cost $12 per month.

Netflix May Be Getting Aggressive with Quest for Oscar

As NFLX has been investing more in its original content, some of its films have been up for an Oscar award. So far, it’s fallen short. NFLX film Roma was among the nominees for 2018 best picture. In a move that appears to be positioning for better chances for a win, NFLX is reportedly in talks to buy Egyptian Theatre in Hollywood, an unnamed source told CNBC.

That way, NFLX could better control exactly when it airs its content at the cinema, and when that film is available for streaming. Typically, theater operators like to run films for about 90 days before they are available for streaming, but NFLX launched Roma to streaming much sooner.

What to Consider Watching in Netflix’s Q1 Report

Investors tuning into NFLX’s quarterly report may want to consider that NFLX is among the companies that benefit along with the health of the consumer. After all, with more money to spend, people can better afford to sign up for its services. Lately, the average U.S. consumer has apparently been just fine and dandy, if you look at the U.S. jobs scene, which has started to trigger rising wages. This month, investors learned that there were 196,000 jobs created in March and hourly wages increased 3.2%. The number of people filing for unemployment hit a 49-year low in the week ended April 9, according to U.S. Labor Department data.

For NFLX, the positive economic drivers have likely played a role in its recent performance. Last quarter, the company posted results that beat Street estimates for earnings and subscriber numbers, but fell a bit short on revenue. It offered guidance for Q1 that was more modest than third-party analysts expected.

For Q1, the third-party consensus earnings is $0.57 per share, compared with $0.64 a year ago. Revenue is projected to rise to $4.5 billion, up from $3.7 billion last year. NFLX said it expects to add 8.9 million net additions globally, including 1.6 million in the U.S. in Q1.

Perhaps when NFLX posts its results, investors can learn how a price increase in January, in which its monthly fee increased to $9 from $8 for its basic plan, may have impacted the bottom line. The most popular plan, the HD standard plan, now costs $13 per month, up from $11, and its 4K premium plan is now $16, up from $14.

How the price increase impacts its revenue may hinge in part on any increase in content spend and how many new subscribers NFLX welcomed this quarter. New customers had to pay the higher price immediately, while those who were already subscribed were grandfathered in over three months, so we may not see the full effect of the price increase until Q2. 

Netflix Options Activity

Options traders have priced in a 6.8% ($23.90) stock move in either direction around the coming earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform

Put options have been active at the weekly 330 and 340 strikes, while call option activity has been heaviest at the 360, 375 and 400 strikes. Implied volatility was at 41st percentile as of this morning. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.  

Figure 1: Making Strides. Netflix (NFLX) shares (candlesticks) have gained ground this year, but competition in streaming is heating up. The purple line is the Nasdaq Composite Index. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Good Trading,

JJ

@TDAJJKinahan

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