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Will Netflix (NFLX) Keep the Earnings Streak Alive in Q1? - Analyst Blog

Netflix, Inc.NFLX is set to report first-quarter 2015 results on Apr 15, after the closing bell. In the last quarter, the company delivered a positive earnings surprise of 63.64%. The company has delivered positive earnings surprises in the last four quarters, with an average beat of 18.41%. Let's see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

Zacks ESP:Earnings ESP , which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is at +22.06%. This is a meaningful and leading indicator of a likely positive surprise for the company.

Zacks Rank : Netflix carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank of #1, 2 and 3 have a significantly higher chance of beating estimates.

We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

The combination of Netflix's Zacks Rank # 3 and +22.06% ESP makes us confident in looking for a positive surprise on Apr 15.

What is Driving the Better-than-Expected Earnings?

We expect the consistent increase in Netflix's paid subscriber base in the streaming segment, both domestically and internationally, to drive top-line growth. These factors are expected to generate significant revenue synergies that will outpace content and marketing spending, leading to margin growth.

The significant subscriber growth can be attributed to Netflix's diversified streaming content. According to reports, the company expects to launch 20 shows in 2015, almost double of 2013 and 2014 premiers. Netflix has also started a smart TV evaluation program - Netflix Recommended TV - to grade smart TVs that are best compatible with its Internet TV services. We expect this program to boost Netflix's business as Smart TV is the latest development in the television space and manufacturers will increasingly seek Netflix's certifications to boost sales.

Recently, the company also announced that it is planning to increase its share authorization significantly, from the existing 170 million to 5 billion shares.

As its U.S. presence matures, Netflix is planning a rapid expansion abroad. Its expansion in Spain is a reflection of this business strategy. In Jan 2015, the company revealed its plans to expand its footprint in as many as 200 countries over a period of two years. However, international expansion and content additions result in cost escalations in the form of technology investments and marketing expenses. Therefore, margins and profitability will be under pressure over the near term.

Further, Netflix faces competition from bellwethers like Amazon.com AMZN , Hulu and HBO, which offer online streaming services in the U.S. The company also faces significant competition from regional players and new entrants like Apple AAPL , which is planning to enter the streaming services market through its revamped set-top box, Apple TV, scheduled to be launched in June this year.

Stocks to Consider

Here is another stock worth considering that, as per our model, has the right combination of elements to post an earnings beat this quarter:

Allison Transmission Holdings ALSN with Earnings ESP of +4.62% and a Zacks Rank #1 (Strong Buy).

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


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

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