Good News for NFLX Stock?
Netflix, Inc. (NASDAQ:NFLX) has been a gold mine for investors, reaping 2,687.6% in capital gains over the last decade. It’s been an extraordinary run. Many investors are looking for a repeat performance as we approach the next earnings announcement.
Netflix is reporting first-quarter earnings after the bell on Monday, April 18. Analysts are expecting earnings of $0.03 per share, down from $0.38 per share last year. Revenue is expected to jump by 25% year-over-year, but analysts are worried about slowing subscriber growth. (Source: “What to expect from Netflix earnings,” MarketWatch, April 15, 2016.)
The number of new subscribers in each quarter has been falling since the end of 2014. That much is true. However, it’s important to note that those numbers reflect only domestic subscriber growth. The international numbers are blooming, yet analysts are surprisingly deaf to that news. They want to know whether or not Netflix has reach peak penetration in the United States, so I expect that to be a major issue on the conference call.
If I were to venture a guess at Netflix’s response, it would be this: Don’t worry, because we’re squeezing more profit from our American audience.
This gets overlooked. The company edged up its pricing for new members in May 2014, from $7.99 a month to $8.99. For retention purposes, existing customers wouldn’t see their prices go up for another two years.
But that date is almost here and the price increase is going to be bigger than expected. A couple of months ago, Netflix announced another hike to $9.99, which means all their subscribers will be worth (at least) $10.00 every month.
Let’s do the math:
Netflix had approximately 36 million subscribers in the middle of 2014, so with the subscription cost increase, we’re talking about $72.0 million extra in revenue every month. (Source: “Netflix 2Q2014 Shareholder Letter,” Netflix, Inc., July 21, 2014.)
Then the company added another 33 million subscribers between 2014 and 2015. (Source: “Netflix 3Q2015 Shareholder Letter,” Netflix, Inc., October 14, 2015.) Those customers signed up at $8.99, but will be bumped up to $9.99 some time this year—so that’s another $33.0 million per month.
On an annualized basis, we’re looking at roughly $1.26 billion in additional revenue, meaning Netflix has guaranteed itself 19% top-line growth.
And that’s without even counting international expansion, premium accounts, or new subscribers. If we assume similar margins and ratios, then we’re looking at an extra $22.8 million in profit, which translates to about a $23.00 or $24.00 increase in NFLX stock.
All things considered, I expect NFLX stock to continue its spectacular performance through 2016.