NFLX Stock Forecast 2019: Netflix Beats Earnings, What Next?

NFLX Stock Forecast 2019
iStock.com/wutwhanfoto

Netflix Stock Forecast for 2019

Netflix, Inc. (NASDAQ:NFLX) the world’s leading online entertainment service, has been rewarding patient investors. In 2017, Netflix’s share price advanced by nearly 50%; in 2018,  it increased by 36.5% (despite 2018 being a volatile year for the entire stock market).

Despite that strong growth, Netflix stock still has a tremendous amount of upside potential. It could be one of the best technology stocks to keep your eyes on—and not just in 2019.

Thanks to its award-winning shows and movies, its increasing user fees, its expanding subscriber base, and its surging revenue, Netflix’s share price could hit $480.00 in 2019. That would be an increase of about 45% from its current level.

NFLX Stock Financials

Netflix is no longer the DVD rental-by-mail firm your mom and dad used to enjoy. Today, Netflix is the world’s top Internet entertainment service, with more than 139 million paid memberships in over 190 countries. (Sources: “Netflix Releases Fourth-Quarter 2018 Financial Results,” Netflix, Inc., January 17, 2019.

Advertisement

NFLX Stock Financials
Market Cap $139.0 Billion
Forward Price/Earnings 47.8
Beta 1.53
Price/Earnings to Growth Ratio 1.59
Total Cash $3.79 Billion
Total Debt $10.4 Billion
Shares Held by Institutions 75.9%
Shares Shorted 3.66%

(Source: “Netflix, Inc. (NFLX),” Yahoo! Finance, last accessed January 23, 2018.)

NFLX Q4 2018 and Full-Year Earnings

On January 17, Netflix announced its financial results for the 2018 fourth quarter.

The company reported fourth-quarter revenue of $4.2 billion, a 27.4% increase over the $3.28 billion recorded in the same prior-year period (and a 4.7% increase over the $4.0 billion recorded in the previous quarter). (Source: “Letter to Shareholders,” Netflix, Inc., January 17, 2019.)

Revenue Continues to Grow

Domestic streaming revenue for the fourth quarter was up by 22.4% year-over-year at $2.0 billion. International streaming revenue soared by 35.8% to $2.1 billion.

Year-over-year, average paid memberships rose by 26% and average selling prices increased by three percent.

Net income for the fourth quarter was $133.9 million, or $0.30 per share. In the fourth quarter of 2017, Netflix reported net income of $185.5 million, or $0.41 per share.

For fiscal-year 2018, Netflix reported revenue of $15.8 billion, a 35% increase over the $11.7 billion in fiscal-year 2017.

Net income for 2018 was $1.2 billion, or $2.68 per share. In 2017, Netflix reported net income of $558.9 million, or $1.25 per share.

In 2018, the company also almost doubled its operating profits to $1.6 billion. (Source: Ibid.)

Cash Flow

Free cash flow in the fourth quarter of 2018 was -$1.3 billion, compared to -$0.5 billion in the fourth quarter of 2017. For full-year 2018, free cash flow was -$3 billion.

Netflix ended 2018 with cash of $3.8 billion. (Source: Ibid.)

Netflix expects that its 2019 free cash flow will be similar to that of 2018, and that free cash flow will improve each year after that. This free cash flow improvement will be driven by growing operating margin, which is expected to allow Netflix to fund more of its investment needs internally.

Subscriber Growth Remains Robust

Helping fuel Netflix’s revenue growth is its consistently strong subscriber growth, thanks in large part to its original programming.

Netflix knows what viewers want, which is both licensed and original content. And because the company’s shows are on-demand, it is not competing with TV shows that air in specific time slots.

According to one U.S. survey, about 70% of Generation Z and millennials—and 60% of Generation X—stream movies on a weekly basis. More than 90% of Generation Z, 86% of millennials, and 80% of Generation X binge-watch TV shows. (Source: “Meet the MilleXZials: Generational Lines Blur as Media Consumption for Gen X, Millennials and Gen Z Converge,” Deloitte, March 20, 2018.)

That’s a huge majority of the population willing to allow Netflix to compete with their sleeping hours. Good news for Netflix, but bad news for the American Sleep Association.

In the fourth quarter, the company added a record 8.8 million paid memberships (1.5 million domestically and 7.3 million internationally). That represents a year-over-year increase of 33%, and it was higher than the company’s prediction of 7.6 million.

Netflix ended 2018 with more than 139 million paying subscribers, up by 29 million from the start of the year.

Fiscal Year Paid Memberships Growth Year-Over-Year
2015 70.8 million
2016 89.1 million 26%
2017 110.6 million 24%
2018 139.3 million 26%

(Sources: Netflix, Inc., January 17, 2019 op cit. and “2017 Annual Report,” Netflix, Inc., January 29, 2018.)

Netflix vs. Competitors

So, how does Netflix stand up to its competition? For starters, Netflix believes that, as long as it can provide its subscribers with interesting, fresh content that they love, Netflix will remain an industry leader.

Since 2013, when the company launched its first original content, Netflix has grown. With each new original program, it learns more about what its members want and how to produce and promote it more effectively.

Recently, its shows Bird Box and Elite have been capturing the country’s attention.

On the motion picture front, Netflix has garnered 15 Oscar nominations this year. Its film Roma received 10 nominations, including for best picture Oscar, best actress, and best director. “Oscars: Netflix Takes On Hollywood Studios With 15 Noms,” Hollywood Reporter, January 22, 2018.)

Because the entertainment industry is so vast, Netflix believes it can compete successfully with HBO, Walt Disney CoAmazon Prime, Hulu, Showtime, etc.

Interestingly, while investors are concerned about competition from companies like HBO, Netflix says its biggest competition is actually Fortnite, an online video game released in 2017. In its fourth-quarter letter to shareholders, the company said the following:

We compete with (and lose to) Fortnite more than HBO. When YouTube went down globally for a few minutes in October, our viewing and signups spiked for that time. Hulu is small compared to YouTube for viewing time, and they are successful in the U.S., but non-existent in Canada, which creates a comparison point: our penetration in the two countries is pretty similar.

(Source: Netflix, Inc., op cit.)

What about Netflix vs. Hulu? With slightly more than 25.0 million customers, Hulu is in Netflix’s rear-view mirror.

The Netflix vs. YouTube competition remains a topic of interest. YouTube is a viable competitor to Netflix as far as numbers go, with almost two billion monthly users and thousands of individual YouTube channels.

But so far, YouTube doesn’t quite provide the same kind of viewing service that Netflix does. YouTube seems more like a philosophical competitor rather than one that is an economic threat to Netflix’s global dominance.

The crowded online/TV subscription marketplace is going to get even more crowded and competitive in the coming years though. “Disney+” and WarnerMedia’s streaming service will debut later in 2019, and NBCUniversal announced that it will launch its own streaming service in 2020.

The most exciting of those three, “Disney+” will stream titles from Walt Disney Studios, Lucasfilm Ltd., and Pixar Animation Studios . This will replace Walt Disney’s current deal with Netflix.

For its part, Netflix appears calm, perhaps for the sake of investors. “Our focus is not on Disney+, Amazon or others, but on how we can improve our experience for our members,” said the company. (Source: Netflix, Inc., op cit.)

Competitor Subscribers

Netflix

139 million+

Fortnite

200 million

HBO

135 million+

Amazon Prime

101 million+ (in U.S.)

Disney Channel

89 million

Hulu

25 million+

 CBS All Access and Showtime OTT

8 million

(Source: Various filings, last accessed January 23, 2019.)

Why Netflix Stock Could Reach $480 in 2019

A Netflix stock forecast of $480.00 might seem a bit aggressive, but it’s in keeping with the stock’s recent growth spurts.

As mentioned earlier, in the fourth quarter of 2018, Netflix’s global paid subscription base increased a lot, beating its own expectations. The company ended 2018 with a record number of paid subscribers.

On the earnings front, the company posted earnings per share that beat its own estimates. Also as mentioned earlier, the company’s fourth-quarter revenue advanced significantly, just shy of its prior guidance.

Full-year revenue growth of 35% should have made investors happy, but it didn’t.

Despite beating virtually all of its other guidance, the slight revenue miss upset investors (although Netflix  didn’t actually miss when you factor in foreign currency exchange).

For a few days after the earnings report was released, knee-jerk investors sent Netflix’s share price down by more than eight percent.

Despite the earnings miss, Netflix’s share price has been bullish in 2019, holding on (for the most part) to recent gains.

That’s because Netflix, knowing that its earnings miss wouldn’t be a big hit, said in the days leading up to its fourth-quarter earnings results that it would be raising its prices for all customers in the U.S. and Canada.

The move will add more than $1.0 billion in profits to the company’s bottom line and allow it to invest in new programs.

And Netflix could certainly use the extra cash, considering that its viewers like older content too, some of which is very expensive.

Many subscribers went into meltdown when it was rumored that Warner Bros. was yanking the show Friends from Netflix. In response to the complaints, the two companies made a deal to keep “Friends” on Netflix throughout 2019—for the princely sum of $100.0 million. (Source: “Why Paying $100 Million For ‘Friends’ Still Might Be A Bargain For Netflix,” Forbes, December 5, 2018.)

For the most part, the subscription price hike is pretty small, like the previous ones have been. That might explain why Netflix subscribers have taken it in stride. The $1.00-$2.00 monthly price increase is a small price to pay for video on demand.

Analyst Take

Netflix has evolved significantly over its 22 years of existence, from a DVD rental giant to an award-winning subscription-based, video-on-demand streaming service.

Netflix continues to report strong quarterly revenue and subscription growth. Whether this meteoric trend will continue in 2019 remains to be seen. By all accounts though, Netflix’s share price should remain bullish this year.

As long as Netflix continues to give its customers what they want, its domestic and international subscriber base should grow, along with its revenue and share price.