Netflix, Inc. Q2 2016 Earnings: Growth Concerns And Brexit Fallout In Focus

  • After a tremendous year in 2015, Netflix stock has significantly underperformed the S&P 500 YTD.
  • Disappointing domestic growth, lack of progress in China and the Brexit fallout put a lot of pressure on the stock price.
  • If management fails to reassure the market about future growth, the stock price drop will accelerate.

The streaming content giant, Netflix (NSDQ:NFLX) is expected to report its Q2 2016 earnings results next week amid the sharp fluctuations in its stock price, the CW and Comcast (CMCSA) deals, and the bearish notes by Jefferies and Needham. Netflix is a fascinating investment case – flowing on the waves of the buzz and hype of disruptive streaming video services and worldwide expansion, the stock yielded a phenomenal 134% return in 2015 and was the S&P 500 best performer (outperforming the other FANG members too). However, as shown in the chart below, since the beginning of 2016, Netflix stock has failed to mimic its 2015 performance, falling 15% in the year-to-date.

Also read: Will India Prove To Be A Key Driver For Netflix, Inc.?

NFLX_chart 6_071016

Netflix's negative return in 2016 was affected by the company’s disappointing Q1 results that not only missed on revenue but also provided lower than expected subscriber growth figures. Moreover, Netflix’s competitive challenges domestically, alongside the disappointing progress in penetrating China, turned investors’ sentiment towards Netflix into negative territory. Jefferies mentioned in a bearish note published last week that it would be tough for Netflix to continue growing in the U.S. at the same pace it did so far given the market share it had already achieved and the intensifying competition. The massive competition in the domestic market is illustrated by the chart below, which presents only the major players. Every one of these players and others that are not included will increase efforts to generate more revenues from the U.S. market, and that will impact local revenues of Netflix.

NFLX_chart 7_071016

Sell-side shop Needham & Co. is worried about the long-term implications of the Brexit on Netflix revenues from the UK and the EU and estimates that around a third of the 11 million subs in the UK and the EU are at risk due to a potential macroeconomic slowdown. A Netflix subscription is considered by many a luxury item and will be eliminated in case of a financial drawdown. As the UK leaves the EU, it is not clear how the new UK regulations will address video streaming licenses, and there are concerns that Netflix’s business there might be negatively impacted.

Slightly offsetting the market sentiment, Netflix announced two significant strategic deals with major media players—CW and Comcast. With the CW deal, Netflix remains the exclusive subscription streaming service to feature CW programs in the US. The deal narrows the window between a show’s season finale and its availability on Netflix to only eight days. The Comcast -A (NSDQ:CMCSA) deal brings Netflix content into Comcast’s X1 set-top box and makes it easier for X1 users to stream Netflix content directly from their set-top box without the need to switch to another external device like Apple TV or Roku, for example.

As Netflix has failed to provide any eye-opening news about its progress in penetrating the Chinese market, investors are becoming more skeptical about the company's ability to meet the 2016 full year revenue consensus of $8.7B, which is a 28% year-over-year growth compared with 2015. The Brexit fallout, which might affect Netflix’s subscriber base in the UK and EU, together with the uncertainty about a China expansion, also puts the 2017 revenue consensus of $10.9B in question. These headwinds have sent Netflix stock down since the beginning of the year. However, some clarification from management about Brexit's impact and progress in China could calm down the market. Moreover, the company should reassure the market concerning the pessimist domestic growth in order to halt the decline in the stock price.

Netflix stock is a growth stock with a valuation that is based on future growth potential both in the US. and globally – if management does not reassure investors that the company will meet its growth targets for 2016 and 2017, the stock's decline will accelerate, reflecting the market's disappointment. Moreover, at times of uncertainty in the markets, investors look for added value, which, in the case of Netflix, is rapid worldwide growth – if the company fails to deliver, the main investment catalyst will be undermined, and the stock price will plunge.

These are the comparable figures to watch out for in this earnings release:

Q2 2016 Consensus Q2 2015 Actual
Revenues $2.1B $1.6B
EPS $0.024 $0.06
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