This Is What Earnings Could Mean for NFLX Stock
Markets turned against Netflix, Inc. (NASDAQ:NFLX) stock since entering 2016. Despite some recovery in April, shares are still deep in the red year-to-date. Now, the company is reporting earnings again. Could this help boost the appeal of Netflix stock?
Well, given its 300+ price-to-earnings (P/E) multiple, investors already have high expectations for the company. Any sign of a slowdown could trigger another round of downturns.
However, there is still a way for Netflix stock to regain some investor appeal.
First, let’s take a look at what analysts are expecting from the on-demand video streaming giant.
The overall expectation is that NFLX stock’s revenue could keep growing at a double-digit pace, but the bottom line could deteriorate—not uncommon for an Internet company still considered to be in its expansion stage.
At the top line, analysts expect Netflix to generate $2.11 billion of revenue, representing a 28.4% increase year-over-year. Due to the company’s sizable spending to obtain content as well as to expand its global presence, earnings per share (EPS) are expected to fall from $0.06 per share in the year-ago period to just $0.02 per share. (Source: “NFLX Analyst Opinion,” Yahoo! Finance, last accessed July 18, 2016.)
Stats on Netflix, Inc.
|Analyst EPS Estimate||$0.02|
|Change from Year-Ago EPS||-66.7%|
|Revenue Estimate||$2.11 billion|
|Change from Year-Ago Revenue||28.4%|
|Earnings Beats in Past 4 Quarters||3|
Data source: Yahoo! Finance
Again, for a company still in its expansion stage, the most important number in this earnings report is subscriber growth. Last time it reported, Netflix added a record 6.74 million members worldwide. The main reason for such impressive growth was the fact that the company expanded into 130 additional markets in January 2016. Among the 6.74 million users added in the first quarter, 4.51 million came from outside of the U.S. (Source: “Q1 16 Letter to Shareholders,” Netflix, Inc., April 18, 2016.)
However, note that despite solid growth in the first quarter, investors did not cheer for Netflix stock. One of the reasons behind that was its guidance. For the second quarter, the company expects to add 2.5 million members, with 500,000 in the U.S. and two million internationally.
Analysts have different predictions on how many new subscribers Netflix could gain in the second quarter. Based on the stock market’s reaction to Netflix’s announcements in recent months, the company has to at least meet its own 2.5-million-member growth target for investors to reconsider the stock.
Just like last time, international growth will continue to be a key focus. U.S. subscriber growth is expected to slow down. With the company’s entrance into 130 countries in January, the total addressable market for its service has been expanded substantially. This is the second earnings report since Netflix became almost fully global and the momentum of international signups could continue.
Last but certainly not least, investors would want to know about a market that Netflix is yet to enter—China. The company said last time that they were “continuing discussions but have no material update on our approach or timing.” (Source: Ibid.)
This time, it could provide another update on the matter and analysts will likely ask questions about the progress in the earnings conference call. If Netflix can offer its service to a market with more than 1.3 billion people, it could be the next big catalyst for the NFLX stock.
The Bottom Line on Netflix Stock
Netflix is scheduled to report second-quarter earnings on Monday, July 18 after the closing bell. As we have seen last time, beating top- and bottom-line expectations wouldn’t be enough. For Netflix stock to regain investor appeal, the company would need to show some solid subscriber gain, as well as bullish guidance.