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Netflix Inc (NASDAQ:NFLX) will report first-quarter earnings on Monday. Will earnings propel NFLX stock to new highs?
Shares of Los Gatos, California based streaming giant Netflix Inc (NASDAQ:NFLX) are slowly regaining momentum back going into its first-quarter earnings on April 16th, after the closing bell. The recent price target hikes have only further helped its cause. Such has been the bull run of NFLX stock that it is still up more than 61% in the year to date despite the recent across the board sell-off in the tech stocks. Netflix stock is up over a whopping 100% 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 with the stock still around 9% lower than its recent highs? Should you buy Netflix stock going into the earnings?
Netflix to deliver another earnings beat?
The Wall Street consensus expects Netflix to report earnings of $0.63 a share on revenue of $3.69 billion. The Wall Street consensus implies revenue growth of nearly 40%, on a year-on-year basis and EPS growth of 60% over the year-ago EPS print of $0.4 a share. The expected earnings growth is comparatively much lesser than the 173% YoY growth in EPS the company had reported in the last quarter, yet this is a solid growth expectation. Netflix is likely to deliver an earnings beat again in the first quarter. The current whisper number for Netflix Q1 earnings is 64 cents, a cent higher than the street estimate. However, a lot of the post-earnings movement in Netflix stock price will be decided mostly by the company's subscriber growth. Netflix added a record 8.3 million subscribers in Q4 2017.
Netflix Cash burn: a cause of concern?
Many investors have been concerned about the company's negative free cash flows. Reed Hastings founded company reported negative free cash flow of $2 billion for the full year 2017. Netflix forecasts a free cash flow of negative $3-$4 billion in 2018. There are already concerns about Netflix's highly leveraged balance sheet. However, the management believes that content investments are helping in driving growth. If Netflix manages to execute its content plan well, things will look good in the end. As the service gets better with original content, Netflix will grow bigger and faster. This will also attract more customers and increase its capacity to charge those customers a bit more.
There was some good news on the debt and cash flow front for Netflix investors. Moody's raised its rating on Netflix's $6.5 billion of debt to Ba3 from B1 and suggested the company would become cash flow positive by 2022. However, they are still junk-rated but an improvement on rating towards the more stable end of the junk-bond rating spectrum looks encouraging. Moody's analyst Neil Begley said steady subscriber growth along with improving margins will aid in generating positive cash flows.
The top management in the last earnings call reiterated that their primary profit metric is operating margin and are targeting the FY 2018 operating margin of 10%, up about 300 basis points year over year. If the company were to achieve its target, that will ease concerns surrounding the negative free cash flows and suggest the company is on track for positive cash flows soon. Moodys estimates the margins to grow from the 7% in 2017, to the low to mid 20% range to generate positive cash flows. The company has shown strong improvement on this metric over the past few quarters.
Netflix Inc's subscriber growth crucial to stock's post earning performance.
For Q1, Netflix has guided that it will add 6.35 million subscribers worldwide, 1.45 million in the US and 4.90 million internationally. The record subscriber growth in 2017 Q4 has been a major driver behind NFLX stock's bull run in 2018. So, the company cannot afford to slip up on this metric. Moody's analysts predict Netflix to hit 200 million subscribers by the end of 2021 that would mean an average addition of 5.13 million subscribers every quarter from the next quarter onwards. This is much higher than the research firm eMarketer's forecast which puts Netflix subscribers at 142 million by 20201. The outlook looks promising but the key is whether the company can keep delivering on this front. With the rise of video streaming across all age groups especially in the US, Netflix has a good chance to capture the majority of the new audience, given its popular content slate and its focus on quality content.
Despite the streaming company's hot subscriber growth rate, there are some concerns which could be fatal for the stock in the long term. There's no doubt that investor's worried about the stock's valuation which is trading more than 200 times its earnings. But many believe Netflix would go the way Amazon and Tesla Inc (NASDAQ:TSLA) have. Hence, Netflix just cannot afford to miss on the growth metrics. Any update on the upcoming content slate would also be vital to the stock's fortunes.
Netflix is playing the long game but sooner the red flags such as negative cash flows would start posing a question. It would be quiet interesting how Netflix defends its territory when Walt Disney (NYSE:DIS) is out with its own streaming service. Analysts continue to remain bullish on NFLX stock with only 2 sell ratings out 40 analysts as per Yahoo finance. However, Netflix stock is trading well above the average target price, hence any miss on key metrics could see a substantial correction. However, Netflix stock has built some good momentum going into the earnings with the popular momentum indicator MACD turning bullish as well after yesterday's trade.
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