- Netflix market share has increased to 57.5% of total video streaming market, compared to 52.5% in the year ago quarter.
- Given the likely growth in subscriber base and the strong earnings history of Netflix, an earnings surprise in Q1 2014 may be on the cards.
- The growth and more is already factored into the stock price which makes Netflix a high risk investment.
Netflix (NASDAQ:NFLX), the online video streaming provider, is set to report its first quarter results on April 21 after market close. Netflix stock price movement in the year-to-date has been in stark contrast to the record gains of 2013. The stock has lost 10% in the year-to-date compared to a gain of over 300% in 2013. The latest fall in the stock price has come inspite of a record growth in Q4 of 2013. Will Q1 2014 be yet another solid performance combining with the latest fall to present an attractive risk/return potential for an investor? Let’s look at what to expect from the Los Gatos headquartered streaming service provider in the earnings release (ER) on Monday.
Strong subscriber growth to continue
The fundamental driver of Netflix revenues has been the growth of its subscriber base. The company’s increased focus on international operations is expected to accelerate topline growth in the second half of 2014. More importantly the growth in international subscribers and revenues will be under scrutiny, as the company is yet to make profits at the net level since expanding into geographies beyond the United States. The chart below traces the growth rate in domestic and international subscribers over the last year and a half.
The growth in international operations is clearly visible as international subscribers are increasing as a proportion to the total subscribers with each passing quarter. The company has guided to Q1 2014 domestic subscriber base of 35.67 million (22% Y/Y) and international subscriber base of 12.53 million (75% Y/Y). The guidance represents an international subscriber base which is 26% of the total subscriber base.
The market expects Netflix to report subscriber growth ahead of the guidance, though it will be interesting if the problems faced by Netflix’s Comcast users have any negative impact on the growth of Netflix subscribers. A report cited on ValueWalk suggests Netflix growth will be on track, with the company now accounting for 57.5% of total online video traffic compared to 52.5% in the year ago quarter.
As cited in our earlier review of Netflix’ Q4 2013 results, the company has seen a solid improvement in its business fundamentals over the last few quarters. With no major expansion outlined for the first half of 2014 and the expected growth in subscribers, the earnings growth will continue to remain strong. Let’s now take a look at the analyst consensus estimates of Q1 numbers.
|Q1 2013||Q1 2014 analyst consensus||Y/Y growth|
|Revenue (in billions)||1.02||1.27||24.5%|
|Adjusted EPS (in $)||0.31||0.83||167.7%|
According to streetinsider.com, Netflix analyst consensus estimate is earnings per share (EPS) of 83 cents (167% Y/Y) on revenues of $1.27 billion, implying a revenue growth of 24.5% on a Y/Y basis. Netflix management has guided to an earnings per share of 79 cents, implying a Y/Y earnings growth of 154%. The company has beaten analyst consensus earnings estimates in each quarter for over three years now with an average earnings surprise of 23% over the last four quarters.
The subscriber growth will continue to drive revenue growth during Q1 and beyond. The increase in market share of total online video traffic is a fair indicator of solid subscriber growth. Given the strong earnings history of Netflix and the expansion in market share, trumping the consensus estimates is the likely outcome in Netflix’ Q1 2014 ER. However, even after the recent correction, Netflix continues to remain risky given the growth already priced into the stock at a price-to-earnings multiple of 179 (as on April 16).
To see Netflix’s current stock price, please click here: (NASDAQ:NFLX)