Q4 Preview: Netflix (NFLX) Future Lies in the Starz

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Netflix, Inc. (Nasdaq: NFLX) shares are lower today, ahead of the company's fourth quarter earnings release, expected out after the market closes. Shares are down0.5% today.

NFLX is expected to report EPS of $0.71 with revs of $597.23 million. Last quarter, the Los Gatos, CA-based video rental service provider posted EPS of $0.78, ex-items, on revs of $553.2 million, topping consensus estimates. Looking at Q409, we see Netflix produce EPS of $0.59, ex-items, paired with revs of $444.5 million, topping Street views looking for EPS of $0.45 and revs of $444.5 million.

Shares gained 13.6% through the quarter, to $175.70 at the end of December. The stock is up 4.7% since then, and made a good run through 2010, ending 228.5% higher.

A simple valuation puts Netflix with a forward P/E of 47.8x FY11 EPS estimates, comparable to 50.5x for Amazon.com (Nasdaq: AMZN).

Data from Bloomberg has 6 analysts with a Buy on NFLX, 18 with a hold, and seven suggesting to Sell. The analyst price target average is $159.5, with a high of $225 and low of $78. Shares have traded in a range of $209.24 - $48.52 over the last 52-weeks.

Summary
Netflix issued an outlook with Q310 results calling for EPS of $0.59 - $0.74 and revs of $586 - $598 million. Subs expected to end at 19.0 - 19.7 million.

  • Wedbush is looking for EPS of $0.75 with revs of $601 million. They believe that ending subs may come in higher than their estimate of 19.7 million. Wedbush notes that the new $7.99/month streaming package and higher prices for unlimited plans will offset lower ARPU resulting from the migration of existing customers to the streaming plan.

    The firm notes that while Netflix should meet their expectations, looking at the company longer term one might become concerned with continued heavy spending on their streaming catalog, which will be a drag on margins down the line. Wedbush estimates an annual cost of $190 million for EPIX, $30 million for Starz (which could potential swell to $200million if the license is renewed) $60 million for other movie content, and $50 million for other TV content, and the firm thinks that savings in postage will not fully offset spiraling content costs.

    Wedbush has an Underperform rating on the shares, with a price target of $78.

  • Dougherty & Company is looking for Q410 EPS of $0.73 on revs of $595.5 million. They note that their model calls for a 59% increase in subs, a decline in churn, and 11.8% in operating margins. They think that, at about 40.3x their FY11 EPS estimate, the shares are priced for perfection. However, with their estimate of EPS for FY12 of $5, they recommend to pick up shares on any signs of weakness (specifically, at a $170 entry point). They expect net ending subs of 19.465 million.

    Key topics Dougherty notes include: a Canadian launch update, the impact from Hulu Plus, "confirmation of the continuation of the recent trend of rising consumption of streaming content paired with lower per subscriber disc usage," any plans for entry into additional international markets, ability to maintain operating margins, is there a pick-up in Blu-ray based plans, an updates on the Starz contract renewal.

    Dougherty has a Neutral rating on the shares, with a price target of $180.
Two other items investors may be looking at: CFO replacement and their progression with Facebook. On December 7, 2010, then-CFO Barry McCarthy decided to leave the company to explore other pursuits. Also, Netflix listed "Facebook Integration Engineer Architect" as a job that their hiring for on their careers site.

Netflix has been a battleground between bulls and bears. Analysts may ask about CEO Reed Hastings' rare move to address short sellers in the media .

Netflix, Inc. is expected to release their Q410 earnings on Wednesday, January 26, 2011, at approximately 4:00pm EST. Stay tuned to StreetInsider.com's EPS Insider section to see our analysis of the highly-anticipated quarterly results withi0 n seconds of their 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 , NFLX

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