Netflix to Report Earnings Today: Will It Top or Flop?
Netflix, Inc NFLX is set to report first-quarter results, after the closing bell on Apr 16. The company saw superb revenue growth last year on higher subscribers in the United States and international markets. Netflix now boasts more than 139 million subscribers across 190 countries and the count is expected to grow on an array of original series, documentaries and feature films.
This time around, Netflix is under tremendous pressure to deliver upbeat results in order to maintain the rebound from nearly $250 last December to the present almost $350. Let us, thus, take a look at the factors that will influence Netflix’s results this earnings season.
Is Competition Getting Severe?
Netflix is struggling to maintain streaming subscriber growth and prevent customer loss to rivals. Apple Inc AAPL and Walt Disney Co. DIS recently came up with their versions of streaming services and are going all out to woo Netflix subscribers. A lot of content, in the meantime, is already out of Netflix’s list of programs, including Marvel titles and Disney originals such as Moana. To top it, Netflix has been facing stiff competition from the likes of Amazon.com’s AMZN Prime Instant Video and AT&T’s T HBO Now.
Despite all odds, Chief Executive Reed Hastings is pretty confident. Management believes that the current streaming rivals as well as soon-to-launch offerings from Apple and Disney are temporary blips, given Netflix’s huge customer base and wide range of entertainment sources. In fact, Netflix expects paid net member addition of 8.9 million in the first quarter (1.6 million added in the United States and 7.3 million internationally), higher than analysts’ expectations of 8.5 million.
Price Hike: Boon or Bane?
Netflix has announced price hikes across the board in the United States and some Latin American markets. In the United States, new prices will be phased in for existing members over the first and second quarters. And for new members, Netflix will increase the Standard plan from $10.99 to $12.99 per month in the United States. The Premium plan will get be priced higher at $13.99 to $15.99 per month, while the Basic plan will rise from $7.99 to $8.99 per month. The hikes are expected to show on the company’s revenue per customer in the first quarter and beyond.
Price increases will also help the company use the extra cash to pay debts and finance additional original programming. Skeptics may argue that the price hikes will result in subscriber churn. However, over the past five years, domestic streaming subscriber count has surged from less than 45 million at the end of 2015 to more than 58 million at the end of last year despite steady increases in prices. This clearly indicates that existing members continue to be loyal and new ones are still drawn to the content Netflix offers.
At the same time, price increases show the company’s confidence in its pricing power. Needless to say, companies that have the ability to raise prices higher than inflation without affecting sales figures are, undoubtedly, doing great business.
Berkshire Hathaway Inc. BRK.B CEO Warren Buffett said that “the single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business.”
Netflix to Begin the Year With Strong Top-Line Growth
Even though competition heated up for streaming viewership, subscriber counts are expected to have expanded in the first quarter. Moreover, the recent price hike will boost revenue growth. Netflix, thus, is widely expected to post revenues of nearly $4.5 billion for the first quarter, up from around $3.7 billion a year ago.
The Zacks Rank #3 (Hold) company also has an Earnings ESP of +0.44%. And our recent 10-year backtest result shows that stocks that have a positive Earnings ESP and a Zacks Rank #3 or better show a positive surprise nearly 70% of the time, and have returned more than 28% on average in annual returns. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Netflix, Inc. Price and EPS Surprise
Positive results, no doubt, will lead to a rally in the share price. Thus, the company’s expected earnings growth rate for the current year is 48.5%, way ahead of the Broadcast Radio and Television industry’s estimated rise of only 0.3%. Actually, the company has outperformed the broader industry so far this year (+30.3% vs +26.1%).
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