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Earnings Preview: Netflix Streams Q1 Results After Close

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April 17, 2017
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Currently trading near its all-time high of $148.29, which it hit at the end of March, Netflix (NFLX) reports Q1 2017 earnings after market close today. In the last four quarters, NFLX stock has experienced substantial price volatility around its earnings releases. Last quarter, its stock jumped when the company’s earnings beat expectations and subscriber growth came in much higher than analyst estimates.

Subscriber growth is a key metric watched by many analysts following the company, and CNBC has said its “stock success has been mostly based on its ability to add paid subscribers”. NFLX is expected to add 5.3 million subscribers this quarter, down from 7.1 million subscribers last quarter and the 6.7 million added in the same quarter last year. When it reported Q4 2016 results in January, the company had 93.8 million members total with over 47% of its total members outside of the United States. 

The company’s subscriber growth has been slowing in the United States, which some analysts believe is a sign the company is getting closer to domestic market saturation. Baird analyst William Power recently lowered his forecast for Netflix U.S. subscriber additions in Q1 to 1 million from 1.5 million based on the investment bank’s quarterly U.S. subscriber survey. Power said he expects the company to add 3.7 million international subscribers this quarter, the same as company guidance. As domestic growth slows, international growth has been a greater focus for many analysts.  

All those new subscribers haven’t come cheap for the company. NFLX plans to spend over $6 billion on content in 2017, up from $5 billion in 2016. In its 2016 letter to shareholders, the company said “we continue to invest in local programming to complement our content offering and as a means to introduce new members to our global library”. In 2016, it was projected to have the second highest content spending out of media companies, according to research conducted by the Boston Consulting Group and SNL Kagan. The only company to spend more was Disney’s (DIS) ESPN with an estimated $7.3 billion spent on content.

Last year, Amazon (AMZN) launched a standalone Prime Video service that costs $8.99 per month, comparable to NFLX’s plans starting at $7.99 per month. Prior to offering the standalone streaming service, AMZN’s TV shows and movies were available as part of its Prime membership. AMZN has also increased its content spending and is estimated to have spent between $3 billion and $4 billion on content in 2016.

Netflix Company Profile Shown on thinkorswim platform by TD Ameritrade

FIGURE 1: NFLX COMPANY PROFILE.

NFLX’s international subscriptions are estimated to grow to 110 million by 2023, according to Insight Guru. This feature on the Fundamentals tab on the thinkorswim® platform allows TD Ameritrade clients to analyze potential revenue drivers of a stock. Trefis information and estimates used in Company Profile are provided by Insight Guru, a separate and unaffiliated firm. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Netflix Earnings

NFLX is expected to report earnings-per-share, or EPS, of $0.38 on revenue of $2.64 billion, according to consensus third-party analyst estimates. Netflix reported EPS of $0.06 in the same quarter last year.

The stock closed at $142.92 on Thursday (markets were closed on Friday) and short-term options traders have priced in a potential 7.2% share price move in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform. Calls have been active at the 145 and 150 strike prices while puts have seen activity at the 140 and 145 strikes. The implied volatility sits at the 48th percentile.

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.

NFLX YTD Stock Performance Compared to SPX

FIGURE 2: FRESH OFF RECORD HIGHS.

NFLX, compared to the S&P 500 (SPX), recently hit an all-time high at the end of March and is up over 15% since the start of the year versus the SPX’s 4% increase. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Earnings season is in full swing and there are some major companies reporting this week. In the financial sector, Bank of America (BAC) and Goldman Sachs (GS) report before market open tomorrow and Morgan Stanley (MS) reports before market open on Wednesday.

Good Trading,
JJ
@TDAJJKinahan