Netflix (Shutterstock photo)
Internet movie streaming giant Netflix (NFLX) will report first quarter fiscal 2018 earnings results after the closing bell Monday. And if you’ve followed how NFLX stock trades on earnings reports, the company’s subscriber growth totals will be the key metric driving the share price.
In that vein, Wall Street’s expectations are high. Thanks to the company’s breathtaking fourth quarter numbers and its confident guidance, the stock is presently valued at 120 times fiscal 2018 consensus profit estimates of $2.72 per share. This compares to a forward P/E of 18 for the S&P 500 index. In other words, not only must Netflix crush its top- and bottom-line estimates, investors expect confident guidance. But will the company deliver?
For the quarter that ended March, Wall Street expects Netflix to earn 64 cents per share on revenue of $3.69 billion, translating to year-over-year growth of 60% and 40%, respectively. For the full year ending December, the Los Gatos, Calif.-based company’s earnings are projected to rise 117% to $2.62 per share, while full-year revenue of $15.86 billion would mark an increase of 35.6% year over year.
Netflix must also convince investors that the so-called “peak subscriber growth” issue is many years away. First quarter consensus total subscriber net additions calls for 1.45 million in the U.S., while 5 million subscribers is expected internationally. This compares with the company’s guidance of 1.45 million for the U.S. and 4.9 million overseas subscribers.
The fact that Netflix’s subscriber growth in the U.S. has declined from 26% in 2012 to 10% in 2017 has been a concern. But Rob Sanderson, analyst at MKM Partners, who has a $320 price target on Netflix, believes the fears are overdone.
"While there is certainly a bullish sentiment surrounding the stock, we think that many investors still underestimate the Netflix story particularly with respect to the penetration opportunity around the world," Sanderson argued. "We think that continued subscriber momentum, both domestic and international will lead to a rethinking of earnings power.”
The company is coming off its best single-quarter for subscriber growth, adding 8.3 million subscribers in Q4, crushing consensus estimates of 6.4 million. Despite this growth, Netflix shares have been under pressure, falling as much as 20% from its all-time high of $334, dragged down amid the broader tech selloff, which has also impacted its FAANG peers: Facebook (FB), Amazon (AMZN), Apple (AAPL) and Google (GOOG , GOOGL).
Tightening trade policies and rising interest rates are seen as risks to tech valuations. In the case of Netflix, investors are also wary of increased competition not only from the likes of Hulu, Amazon and Google’s YouTube TV, but also from an upcoming streaming service from entertainment powerhouse Disney (DIS). Are these fears overdone?
The fact that Netflix’s quarterly profits are expected to grow at twenty percentage points faster than revenue underscores the company’s pricing power, which is a key factor, given the increased investments the company continue to make not only to grow its international subscribers, but also in original content. And until there are clearer signs of slowing growth, staying long Netflix stock seems a good strategy.