Netflix, Inc (NASDAQ:NFLX) will report third-quarter earnings on Monday. Netflix stock is up by over 93% in the last one year.
Shares of Los Gatos, California based streaming giant Netflix Inc (NASDAQ:NFLX) have gained serious momentum going into the third quarter earnings which the company is set to report on Monday, 16th October. The recent jump in Netflix stock came after the company announced a change in its pricing plan on Monday. NFLX stock rallied more than 5% after the announcement and hit a high of $199.4 in next couple of days before giving up some of its gains. Netflix stock is up over 93% in the last one year, handsomely outperforming the Nasdaq Composite and its competitors like Amazon (NASDAQ:AMZN). The question now is, can earnings propel Netflix stock even higher? Should you buy Netflix stock going into the earnings?
Another earnings beat on the cards for Netflix Inc?
Analysts expect Netflix to report non-GAAP EPS of 32 cents per share, according to Yahoo Finance. This would represent a massive 167% increase in earnings compared to the same quarter a year ago and more than 113% growth on a sequential basis. This a solid growth expectation. And when it comes to delivering on analysts estimate, Netflix has beaten consensus earnings estimate in seven of the past 10 quarters, which is a pretty good track record. It has not missed earnings estimates in any of the recent four quarters. And if you go by the so-called earnings whisper, Netflix is likely to deliver an earnings beat again in the third quarter. The current whisper number for Netflix Q3 earnings is 34 cents, 2 cents higher than the street estimate.
Revenue growth will continue for Netflix Inc
On the top line front, Netflix is expected to report revenue of $2.97 billion for the quarter, representing 29.9% growth over the $2.29 billion the company had reported in the same quarter last year and a sequential growth of 7%. Of the $2.97 billion, Analysts’ expect $1.55 billion from the domestic streaming segment, $1.31 billion from overseas streaming and $110 million from its domestic DVD subscriptions. Netflix doesn't have a good track record when it comes to delivering on its top line estimates. The company has missed revenue estimates in six of the last ten quarters.
Netflix Inc will continue to burn cash.
Investors will also be keenly watching the company's cash flow numbers. Netflix reported negative free cash flow of $2.1 billion in the 12 months ended June 30 and is on the hook to pay more than $15 billion in the next three years for its entertainment programming. Netflix is spending $6 billion on original content programming this year which will increase to $7 billion next year. While the recent price hikes are likely to reduce the cash burn, the company will still be burning hundreds of millions of dollars per quarter, forcing it to access capital markets at regular intervals. There are already concerns around Netflix's highly leveraged balance sheet.
Will Netflix Inc's subscriber growth will take a hit?
Netflix raised its prices on some of its streaming plans in the U.S and some of its international markets. Its $10/month high-definition plan will now cost $11 and the 4K streaming plan, which provides higher-quality content, will see its subscription rate increase by over 16.7% from $12 to $14 per month. This pricing change should add at least $620 million per year to the top-line, without adding any additional costs meaning that most of the added revenue will flow to the bottom line. That would be enough to triple Netflix's annual earnings and reduce the company's free cash burn by 28%, reducing a lot of pressure on the management.
However, there is also a flip side to it. Netflix may see some of its subscribers drop out due to these price increases. The number of subscriber losses, of course, will depend on the price elasticity of demand for Netflix. Last time, when the company had announced an increase of $1 a month for its most popular streaming subscription in 2015 for new customers in the U.S., Canada and parts of Latin America, subscriber growth slid to a three-year low, sending shares plummeting. The reaction was even more violent in 2011 when the company stopped bundling its streaming service with its DVD-by-mail service, resulting in price increases of as much as 60% for customers who wanted both plans. Netflix had lost 800,000 subscribers and its stock price plummeted 80%. Subscriber growth remains a key metric for Wall Street. Netflix stock had rallied heavily after reporting strong subscriber growth in the previous quarter.
There are analysts who are predicting subscriber losses this around too. Though the reaction is likely to be less violent. Wedbush Securities analyst Michael Wedbush believes less than 10% of current subscribers will cancel their Netflix accounts when prices rise again, but he predicts it will be tougher to attract new customers who could choose Amazon’s cheaper alternative. On the other hand, RBC Capital Markets analyst Mark Mahaney believes that the subscriber losses will be minimal as Netflix has gained substantial pricing power in the last few years. Netflix's original content leads the popularity charts.
Because of the recent price hikes, analysts are expecting Netflix to report strong subscriber growth for the current quarter as they believe Netflix would have taken such a step only from a position of strength. A strong subscriber growth could send Netflix stock even higher. Analysts continue to remain bullish on Netflix stock.
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