Will international subscribers keep tuning into Netflix? (Trading Analysis: Netflix Earnings Preview)
By: Colin Cieszynski, CFA, CMT, CFTe (Chief Market Strategist, CMC Markets)
and Jasper Lawler, CMT (Market Analyst, CMC Markets)
Shares of Netflix, the online video streaming service gapped sharply higher to gain over 6% on Monday, two days before it reports its quarterly earnings. The gains were triggered by a bullish broker note but sentiment has been rising since January when Netflix reported stellar results for the fourth quarter.
Concern over a decline in Netflix’s subscriber growth in the US amidst increase competition from Amazon and Apple has been offset by huge international demand for online streaming.
Cable TV is very entrenched in the US and the concern was that many cable customers would be unwilling to pay for online TV too, and those who do, may choose an alternative service.
In response, Netflix has been rapidly expanding internationally as well as creating its own unique content, as an extra draw for potential US subscribers. Netflix added 2.4M international subscribers in the fourth quarter, compared to 1.74M in the same period last year, whereas US subscriber gains were 1.9M, compared to 2.3M last year.
Netflix added Australia and New Zealand as new markets in the first quarter, both of which should start to make big contributions to revenue in the quarters ahead.
Competition from Amazon and Apple is turning out to be a net-positive for Netflix. Established US tech companies offering streaming TV is increasing the size and scope of the market. A bigger market means more potential customers who could switch to Netflix, which has the biggest catalogue of titles.
Last quarter, Netflix beat the street by a country mile, adjusted EPS was $1.21 to $0.73, but sales of $1.48B were pretty much in line with expectations. Trading at a forward P/E of nearly 150X, way above the 36% long-term growth rate, Netflix needs to deliver on earnings and sales growth plus keep its global expansion on track with no hiccups in guidance in order to justify its lofty valuation in the market.
This time around the street is expecting it to report adjusted EPS of $0.97 on sales of $1.57B.
Netflix’s shares totally took off after the company’s last earnings report. The shares had fallen off and the strong numbers took many by surprise who then rushed to jump back on the bandwagon. This time around expectations appear to be higher.
Not only has Netflix been trading in a higher range, between $410 and $490, but since the beginning of this month, the shares have been rallying on anticipation of the upcoming earnings report, lifting up from near $410 up above $450. Depending on how results fare relative to expectations, we could see either side of the $410-$490 channel be tested following the report.
Source: CMC Markets
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