Q2 Preview: Netflix (NFLX) Investors Have Three Concerns: Pricing, Bandwidth, Expansion

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Netflix (Nasdaq: NFLX) shares are trading stronger Monday heading into second-quarter earnings which are expected out after the market closes in just several hours.

The Street is looking for EPS of $1.11 on revenue of $791.48 million. The number's suggest earnings would be flat sequentially, and up 39 percent from the 80 cents per share earned in the same period last year.

Data from Streetinsider has Netflix surprising to the upside on average of 11.5 percent over the last three earnings reports.

Netflix's stock price gained 10.5 percent through the quarter is up 50 percent so far in 2011. Netflix has traded in a range of $95.33 to $304.79 over the last 52-weeks, recently hitting an all-time high on July 13th this year.

Streetinsider's Ratings Insider has ten analysts with a Buy rating on Netflix, eight are Neutral, and six have a Sell. The analyst price target average is $275, with a low of $100 and high of $360.

News Monday suggests Netflix could potentially enter a deal with DreamWorks Animation ( DWA ), though nothing has been confirmed by either company yet.

Also, on every investors' mind will be an update from management on the recent controversial price increase and the LatAm expansion plans.

Analyst Discussion

  • Goldman Sachs expects Netflix to beat views on increased geographic distribution and the potential for faster physical-to-digital transition boosting margin. Goldman sees earnings of $1.26 per share and revenue of $792 million. The firm believes Netflix ended the latest quarter with 25.7 million subs. "We expect ARPU to decline 11% yoy and 3% qoq to $10.70, as the majority of new gross adds take streaming only plans, current subscribers trade down to less expensive plans, and international subscribers take streaming-only plans, offset somewhat by a price increase in November 2010 for subscribers taking DVDs."

    Goldman believes key focus points on the call should include something about Latin America expansion, the price increase, and further color about contract negotiations.

  • Wedbush is looking for earnings of $1.15 per share, revs of $791 million, and ending subs of 25.7 million. Wedbush believes Netflix will limit forward guidance on the call, due to the recent price increase, data cap, negotiations with Starz, and content costs. With pricing, the firm believes Netflix customers will offset higher prices with migration into lower priced plans. Postage savings should be limited.

    On costs, Wedbush believes part of the price increase was due to content costs escalating faster than revs. "Based upon recent deals, we believe that content costs are tracking to $2.2 - 2.5 billion in 2012, up from our earlier estimate of $1.6 - 2.2 billion. The launch of a streaming service in Latin America this year should add significantly to streaming costs."

  • Dawson James Securities sees EPS of $1.03 on revs of $790 million. Dawson argues competition from Amazon (Nasdaq: AMZN), Google (Nasdaq: GOOG) (via YouTube), and Hulu, among others, is heating up. Like Wedbush, Dawson is also weary about the increasing costs of content, which are only likely to go up. The firm believes Level 3's (Nasdaq: LVLT) recent acquisition of Global Crossing (Nasdaq: GLBC) could shift bandwidth pricing power "towards the content delivery network providers." Many providers are also cutting unlimited streaming, meaning Netflix might end up costing much more to subs than just a subscription price.
Stay tuned to StreetInsider.com's EPS Insider section to see our analysis of the highly-anticipated quarterly results within seconds of the release.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: AMZN , DWA , GLBC , GOOG , LVLT

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