Domestic Growth And Global Expansion Will Be The Focus Of Netflix's Q4 Earnings

  • Netflix earnings for Q4 2015 are expected to be announced next week.
  • Focus will mainly be on 2016 international growth and the penetration plan into China.
  • Following the astonishing 134% return that Netflix stock yielded in 2015, investors’ expectations are high.
  • Sharp fluctuations in Netflix stock price are expected following this earnings release.

Video streaming service Netflix (NASDAQ:NFLX) is expected to report its Q4 2015 earnings next week (January 19), following the company’s announcement on CES that it plans to expand globally to more than 130 new countries. The announcement triggered a 9% surge in Netflix stock price, reflecting investors' desire to see Netflix grow rapidly worldwide after the recent expansions into Australia, New Zealand, Japan, and more European countries helped the company maintain its impressive growth rate. This latest Netflix stock price surge was followed by a quick and sharp drop in the stock price partially related to the overall weakness in the stock market and partly related to ITG Research lowering estimations for local subscribers figures, driving domestic revenue slightly lower.

Netflix’s Q4 2015 earnings release will conclude an incredible year for Netflix in which it reached new revenue records and yielded an extraordinary return for its shareholders. The company generated record levels of quarterly revenues and is expected to end 2015 with an impressive 17% YoY increase in top line figure to an all-time high of $6.4 billion annual revenues.

In 2015, market participants grouped Netflix together with Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), and Alphabet Inc-C (NASDAQ:GOOG) in the group of four named FANG that led the S&P 500 annual stock performance. Netflix was the best-performing stock of the FANG group and the best-performing stock of the S&P 500 in 2015 with an astonishing 134% return.
NFLX stock chart

Source: Netflix Stock Price Data by

Netflix's successful 2015 has raised investors’ expectations that the company will continue to grow revenues at least at the same pace as it did in previous years. As shown in the chart below, since 2013 Netflix generated higher revenues each quarter and its five year revenue CAGR stood at 17%. The consensus of analysts estimates is that Netflix will not only continue to grow in 2016 but will increase grow by more than 35% YoY.

NFLX_chart 2_011416

The rising expectations from Netflix could either accelerate its upside – in the case of positive earnings results throughout the year accompanied by subscriber base growth – or it could trigger a sharp decline in the case of disappointment in a similar way to the drop Netflix  stock experienced this week after the ITG Research negative note.

In the previous earnings release, Netflix missed analysts’ expectations for revenue and EPS and triggered a 9% drop. In that earnings release, Netflix presented lower growth numbers than expected, and the market reacted brutally, slashing Netflix stock in what later became a 15% correction in the stock price. Going into the fourth quarter release and annual 2015 summary, investors will be very cautious about Netflix’s growth pace compared to the street consensus and the company’s guidance.

In Q4 2015 results, investors will be looking for two items: one is the domestic subscriber base following the ITG note, and the second one is the total growth rate when the market expects a 23% YoY increase in revenue and some decline in the EPS. Following Netflix’s recent announcement, I believe most of the attention will be focused not on 2015 results but the company’s plans for2016.

Looking towards 2016, international streaming is supposed to drive Netflix’s growth and be the primary catalyst behind the 35% YoY revenue increase the market is looking for. Any deviation from this ultra-growth pace could accelerate a correction in stock price beyond the standard correction followed by the market sell-off. In its CES announcement, Netflix specifically mentioned that its global expansion will not include China, which will be penetrated in an independent effort later in 2016. As shown in the chart below, from Netflix’s presentation, China could add potentially 179 million new households, which would represent a 25% growth in Netflix's spread.

NFLX_chart 3_011416

Source: Netflix presentation on the Citi 26th Annual Global Internet, Media and Telecommunications Conference

These are the comparable figures to watch in this earnings:

Q4 2015 Consensus Q4 2014 Actual 2015 Consensus 2014 Actual
Revenue $1.82B $1.48B $6.45B $5.50B
EPS $0.02 $0.197 $0.384 $0.634


Video streaming service Netflix is expected to report its fourth-quarter earnings next week, following its 2016 expansion announcement made recently. The company is expected to present additional growth as it did in the previous quarters in 2015 driven by domestic and international subscribers’ base growth. After the phenomenal year Netflix stock had in 2015, the focus in 2016 will be on global expansion and the company’s plans regarding China. As I mentioned above, Netflix stock return in 2015 and its impressive top-line increase drove investors’ expectations higher, and that could result in sharp swings in stock price in the case of surprise and more strongly in the case of disappointment.

Lior Ronen Lior Ronen   on Amigobulls :
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