Netflix (NFLX 345.93, +12.80, +3.84%) will report third quarter results in a Letter
to Shareholders on its website soon after the bell. The earnings interview with
management including Chief Executive Reed Hastings starts at 18:00 ET.
Last quarter, Netflix missed its subscriber forecast and guided third quarter EPS, revenue and subscribers below estimates. The stock was up 108% year-to-date, so the miss was a glaring disappointment to investors. The stock gapped down 13% but rallied throughout the session to close down only 5%.
Investors are largely looking for Netflix to get back on its impressive track with third quarter results this afternoon. Netflix had previously reported disappointing subscriber numbers in the second quarter of 2016 and the first quarter of 2017, only to bounce back in subsequent quarters. Management acknowledged that its subscriber metrics are not very easy to predict, noting that U.S. net adds were slightly ahead of last year through the first six months of the year. There is much more upside in international subscribers going forward as the U.S. streaming market is saturated by Netflix and increasing competition.
Netflix has guided for third quarter EPS of $0.68 (vs. $0.29 last year) with an operating margin of 10.5% (+350 basis points year/year) and revenue up 34% to $3.99 bln.
Netflix also guided for 5.0 mln global net subscriber additions (650K in the U.S. and 4.35 mln for the international segment) vs. 5.3 mln in the year ago quarter.
Last quarter, Netflix guided fiscal 2018 operating margin to the low end of its 10-11% prior forecast, but reaffirmed expectations for steady growth in operating leverage in 2019 and beyond with free cash flow burn of $3-4 bln this year.
Expectations are for ~7.5 mln net subscriber additions in the fourth quarter.
To be fair, a few sell-side analysts warned about a soft quarter heading into second quarter results. Now, analysts are generally more upbeat given lower expectations. On Friday, B. Riley FBR's Barton Crockett noted that an acceleration in searches for Netflix original shows during the quarter offset a sequential lowdown in "Netflix" searches. He sees mixed data points as supportive of the company's Q3 guidance.
Netflix may serve as an important tell for growth stocks with demanding valuations in the current environment. Growth stocks have come under pressure this month as less accommodation from the Fed and a breakout in interest rates led to a valuation correction (reminiscent of early 2014) in technology stocks with lofty valuations. A strong report that is not rewarded by the market may reduce optimism for other momentum stocks.
Netflix has a $149 bln market value and trades at 75x EBITDA estimates (50x FY19), ~125x EPS estimates (77x FY19) and 10x revenue estimates (8x FY19). The extreme valuation metrics are a result of the disruption Netflix has caused in the media sector. Despite increasing competition, Netflix has a massive 135 mln subscriber base with ample pricing power as a leader in streaming, which have essentially supplanted the traditional cable bundle for younger audiences. Therefore, investors still see opportunity within the long-term outlook for subscribers coupled with operating leverage. The options market implies a ~10% move in the stock this week.
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