Netflix, Inc.: What to Expect from Netflix Stock (NFLX) after Earnings

Netflix StockNetflix Stock (NFLX) Forecast in 2017

Netflix, Inc. (NASDAQ:NFLX) topped quarterly estimates in the third quarter, but expectations are running dangerously high for the fourth-quarter results. Here’s a quick preview of what’s in store for Netflix stock (NFLX) after the closing bell on Wednesday.

Analysts polled by Thomson Reuters are hoping for $0.13 per share. This would reflect a 30% year-over-year increase, and a 35% surge in revenue to $2.47 billion. (Source: “Netflix earnings: What to expect from the streaming giant,” MarketWatch, January 17, 2017.)

Here’s the good news: Netflix has had three quarters of consecutive top-line growth, so it’s not crazy to expect a repeat performance. The Los Gatos-based company also grandfathered its older accounts into a new pricing scheme, which should provide a decent adrenaline shot to revenue.

But there’s a ton of reasons to be skeptical of NFLX stock. Increased competition from Amazon.com, Inc. (NASDAQ:AMZN) and Hulu LLC has forced Netflix to develop its own shows. The idea is that customers are tied to the streaming service if their favorite shows aren’t available anywhere else. Exclusive and original content is key to the future of Netflix stock.

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However, original content costs a lot of money. Ten episodes of the award-winning drama The Crown reportedly cost $130.0 million to film. Those capital expenditures are likely to blow a hole in Netflix’s cash flow, particularly as the company is building its catalog of original content.

The market may not be pricing these expenses into NFLX stock. If Wednesday’s results provide a blunt reality check, investors would be well-advised to steer clear of Netflix stock. But we don’t know what will happen, so the question could come down to your long-term view of NFLX stock.

Do you believe that Netflix stock is overrated? Or do you think it’s a hidden gem?

If you think there is still a huge market left untapped, then you should be bullish on this stock, regardless of what happens in the earnings report. The long-term trajectory is not going to be undone in a single quarter. Just look at this chart about the future of online video:

Source: "Video's share of global internet traffic," The Atlas, last accessed January 17, 2017.
(Source: “Video’s share of global internet traffic,” The Atlas, last accessed January 17, 2017.)

Consumers are spending more and more of their time on video content, which is unequivocally good for Netflix. Better still, rivals have yet to make significant headway against the pioneer of video streaming. Netflix’s original content strategy has indeed insulated its market share.

But can any amount of growth justify the second-highest price-to-earnings ratio on the market? That is the million-dollar question.