Netflix crushed Wall Street expectations, sending NFLX stock sky-rocketing in after-hours trade
- Netflix Inc. announced its Q4 2016 earnings after the market close yesterday.
- The company beat wall street estimates on nearly every metric.
- The latest ER was proof that the NFLX stock is indeed driven by one core metric of subscriber growth.
Los Gatos, California-based Netflix Inc. (NASDAQ:NFLX) announced its Q4 2016 earnings yesterday, after the market close. The latest earnings report was well received by analysts and investors alike, which saw the NFLX stock price go up like a rocket, gaining 8% in after-hours trade. The after-hours close of $143.8 was a new high for Netflix stock, $7.4 higher than the previous all-time high set in the last regular trading session before the earnings announcement. Going by the huge gains in the stock price, Netflix clearly blew past expectations, its own as well as those of Wall Street.
Netflix Beats Expectations Across All Metrics
The company beat management guidance as well as analyst expectations. Netflix reported EPS of 15 cents a share on a top line of $2.48B, good for 50% earnings growth and 36% topline growth, on a YoY basis. These numbers beat Wall Street expectations of $2.47B revenue and earnings of 13 cents/share.
Netflix' strong performance was not just limited to the past. The management was also bullish on the future prospects, as reflected in its Q1 guidance. The management guided for EPS of $0.37 in Q1 2017, nearly double the analyst consensus ahead of the Q4 earnings report.Looking at overall FY 2016 performance, Netflix reported 35% YoY revenue growth and 54% YoY growth in EPS. The strong earnings growth in the quarter was aided by an expansion of profit margins. Q4 2016 saw the operating margin climb to 6.2%, a 290bps improvement over the year-ago quarter. More importantly, the management sounded confident of improving its operating margin to around 7% in 2017, a 300bps improvement over the current 4% levels (over the last 2 years). (See also: Netflix Stock: Why You Should Sell Netflix, Inc. (NFLX) Stock Now)
The Biggest Surprise
While the company reported strong numbers across the board, the biggest surprise in the Q4 2016 earnings report was the subscriber additions over the quarter. Q4 saw this important metric (from shareholders perspective) jump to an all-time high. The company added 7.05M new subscribers through the quarter compared to analyst expectations of 5.2M additions. The margin of outperformance, on this metric, could be picked as the single biggest reason for the pop in the Netflix stock price, following the earnings release. For Q1 2017, the company expects subscriber additions to drop to 5.2M net adds, in-line with Wall Street consensus.
One Big Concern
However, not all is rosy for the company. The free cash flow levels have been dropping. Netflix hasn't been able to convert any of its profits into free cash flows as the company has been reinvesting more than just its profits back into its business. In fact, the company has consistently been tapping into the debt markets, which has seen its long-term debt and content liabilities swell on the balance sheet. The company will again tap the debt markets in 2017, as it seeks to increase content spending to $6B in 2017, up from $5B content spend in 2016. (See also: Netflix Inc: Is Netflix (NFLX) Stock A Buy At Fresh Yearly Highs?)
The result of aggressive spending on content has been a consistently negative free cash flow metric. As if that isn't enough reason to worry, the negative free cash flows have only increased in size, growing from -$163M in Q1 2015 to -$638.6M in the latest quarter. The ever increasing content costs have been the biggest drag on the free cash flow, as content creation accounted for over $8B cash outflow in FY 2016, up 50% from the year-ago quarter. The growth in content costs outstripped the top line growth by a wide margin, which once again highlights the question if Netflix is caught in a vicious circle of higher and higher content costs, as the company seeks to differentiate itself in a highly competitive industry.
Putting It All Together
Netflix reported a strong Q4 2016 earnings report. The biggest surprise was the quantum of outperformance on the subscriber additions. The earnings surprise combined with the strong subscriber additions number sent the NFLX stock sky-rocketing in after-hours trade. However, the biggest concern shareholders seem to be ignoring is the current cash burn rate of the company. With the Free cash flow spiraling lower with each passing quarter and the ever content costs increasing with each successive year, Netflix has been forced to dip into the debt market repeatedly over the last few years. However, this isn't something which can continue for long, with the firm's debt to equity ratio sitting at nearly 1.5 at the end of 2016. Netflix needs to find a way to make big profits, and quickly. NFLX stock continues to be a high-risk play. Looking for great tech stocks? Check our Amigobulls' top stock picks, which have beaten the NASDAQ by over 113%.