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Netflix (NFLX - Free Report) , the world's largest video streaming company, cheered investors with blockbuster fourth-quarter results after the closing bell on Wednesday. The company topped our earnings and revenue estimates and saw a subscriber boom. This sent Netflix shares surging nearly 10% in after-market trading yesterday to a new all-time high.
Netflix Q4 Earnings in Detail
The company reported earnings per share of 15 cents, a couple of cents ahead of the Zacks Consensus Estimate and up 50% from the year-ago earnings. Revenues climbed 36% year over year to $2.48 billion and edged past our estimate of $2.47 billion. Most of the strength came from global streaming revenue, which was up 35% year over year (see: all the Technology ETFs here).
Netflix added 7.05 million new subscribers globally in the fourth quarter, much higher than the company’s projection of 5.20 million and the year-ago addition of 5.59 million. This marks the largest quarter of net additions in Netflix’s history driven by strong acquisition trends in both U.S. and International segments. International accounted for the bulk addition of 5.1 million while U.S. additions were 1.93 million.
For the ongoing Q1, the company expects to add 5.20 million subscribers, including 1.5 million in the U.S. and 3.7 million internationally. Earnings per share are expected to be 37 cents, more than double the current Zacks Consensus Estimate of 18 cents.
Netflix is celebrating its huge success of the first year of global expansion buoyed by original content like Marvel’s Luke Cage, The Crown and season three of Black Mirror. In addition, the return of Gilmore Girls: A Year in the Life also gave a boost to subscriber growth. Trollhunters, launched in December, was the most-watched kids’ original show and the first Brazilian original series 3%, a sci-fi, post-apocalyptic thriller, was the most-watched original in Brazil.
Solid 2017 Outlook
The online video streaming giant is deeply focused on growing global operating margin. It is operating at a 4% annual margin over the past two years and targeting 7% for 2017. The company is in no rush to push up the margin and is instead aiming a steady increase in revenue and operating margin by balancing both growth and profitability. This strategy is likely to help the company win in the long term (read: Tech ETFs Rebound: Can the Surge Continue?).
The company kept its focus on original content strategy and ramping up production of original shows and movies. It looks to launch over 1,000 hours of original programming in 2017, up from 600 hours in 2016 and 450 hours in 2015. Some of the content includes The Get DownSeason 2, Drew Barrymore's zombie comedy Santa Clarita Diet, and more Marvel series like Iron Fist and The Defenders. Notably, Marvel has been on a winning streak over the past eight years since Iron Man hit cinemas. As such, content spending is expected to increase $6 billion in 2017.
Further, Netflix is focusing on local content that travels pan-regionally or across multiple territories, such as Japanese anime and Turkish dramas. In this regard, it collaborated with Red Chillies Entertainment, the film production company of Indian actor Shah Rukh Khan to show his films globally. Apart from this, the company has also formed strategic partnerships with the likes of TiVo Corp and others.
Though Netflix has a miserable Zacks Industry rank in the bottom 45%, a disappointing Value, Growth and Momentum Style Scoreof F each, and a ballooned P/E ratio of 136.17 compared with industry average of 13.72, it currently retains a Zacks Rank #3 (Hold), suggesting room for upside. Netflix is primed for more growth in the months ahead as it has created an unparalleled lead in the Internet TV business that will likely dominate over the long term.
ETFs to Buy
Investors might want to capitalize on NFLX growth and the upcoming surge in its share price with lesser risk in the form of ETFs. For these investors, we have highlighted four technology ETFs with a higher allocation to Netflix and the potential to be big movers in the coming days.
This fund offers exposure to the largest and most liquid companies that are engaged in Internet-related businesses by tracking the Nasdaq Internet Index. It holds about 83 stocks with Netflix taking the top spot in its basket with 8.6% allocation. Internet software & services dominates the portfolio with 56% share in the basket, closely followed by Internet & direct marketing at 39.2%. The product has AUM of $282.3 million and trades in a light volume of about 21,000 shares a day. It charges 60 bps in fees per year and has a Zacks ETF Rank of 3 with a High risk outlook.
This is an actively managed fund focusing on companies that are expected to benefit from the shift in technology infrastructure from hardware and software to cloud. The fund holds 37 stocks in its basket with Netflix taking the third position at 5.9% of total assets. From a sector look, Internet & mobile applications make up for 29% of the portfolio while Internet & direct marketing, and software & programming round off the next two spots with 17% and 15% exposure, respectively. The ETF has amassed $16.3 million in its asset base and trades in a paltry average daily volume of under 3,000 shares. The expense ratio comes in at 0.75%.
First Trust Dow Jones Internet Index (FDN - Free Report)
This is one of the most popular and liquid ETFs in the broad tech space with AUM of $3.5 billion and average daily volume of around 491,000 shares. The fund tracks the Dow Jones Internet Composite Index and charges 54 bps in fees per year. Holding 42 stocks in its basket, Netflix occupies the third position at 5.2%. Internet mobile applications account for half of the portfolio while Internet & direct marketing makes up for 21%. The product has a Zacks ETF Rank of 3 with a High risk outlook (read: ETFs to Ride on Amazon's Best Ever Holiday Season).
This fund provides exposure to cloud computing securities by tracking the ISE Cloud Computing Index. Holding about 30 stocks in the basket, Netflix takes the second spot at 4.8% of assets. Software firms dominate this ETF accounting for 38.9% share while Internet software services (15.2%) and communication equipment (14.2%) round off to the next two sectors. The product has been able to manage $666.6 million in its asset base while sees moderate volume of about 92,000 shares a day. It has 0.60% in expense ratio and a Zacks ETF Rank of 3 with a Medium risk outlook (read: Catch Cloud with These ETFs).
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Tap the Netflix Growth Story with These ETFs
Netflix (NFLX - Free Report) , the world's largest video streaming company, cheered investors with blockbuster fourth-quarter results after the closing bell on Wednesday. The company topped our earnings and revenue estimates and saw a subscriber boom. This sent Netflix shares surging nearly 10% in after-market trading yesterday to a new all-time high.
Netflix Q4 Earnings in Detail
The company reported earnings per share of 15 cents, a couple of cents ahead of the Zacks Consensus Estimate and up 50% from the year-ago earnings. Revenues climbed 36% year over year to $2.48 billion and edged past our estimate of $2.47 billion. Most of the strength came from global streaming revenue, which was up 35% year over year (see: all the Technology ETFs here).
Netflix added 7.05 million new subscribers globally in the fourth quarter, much higher than the company’s projection of 5.20 million and the year-ago addition of 5.59 million. This marks the largest quarter of net additions in Netflix’s history driven by strong acquisition trends in both U.S. and International segments. International accounted for the bulk addition of 5.1 million while U.S. additions were 1.93 million.
For the ongoing Q1, the company expects to add 5.20 million subscribers, including 1.5 million in the U.S. and 3.7 million internationally. Earnings per share are expected to be 37 cents, more than double the current Zacks Consensus Estimate of 18 cents.
Netflix is celebrating its huge success of the first year of global expansion buoyed by original content like Marvel’s Luke Cage, The Crown and season three of Black Mirror. In addition, the return of Gilmore Girls: A Year in the Life also gave a boost to subscriber growth. Trollhunters, launched in December, was the most-watched kids’ original show and the first Brazilian original series 3%, a sci-fi, post-apocalyptic thriller, was the most-watched original in Brazil.
Solid 2017 Outlook
The online video streaming giant is deeply focused on growing global operating margin. It is operating at a 4% annual margin over the past two years and targeting 7% for 2017. The company is in no rush to push up the margin and is instead aiming a steady increase in revenue and operating margin by balancing both growth and profitability. This strategy is likely to help the company win in the long term (read: Tech ETFs Rebound: Can the Surge Continue?).
The company kept its focus on original content strategy and ramping up production of original shows and movies. It looks to launch over 1,000 hours of original programming in 2017, up from 600 hours in 2016 and 450 hours in 2015. Some of the content includes The Get DownSeason 2, Drew Barrymore's zombie comedy Santa Clarita Diet, and more Marvel series like Iron Fist and The Defenders. Notably, Marvel has been on a winning streak over the past eight years since Iron Man hit cinemas. As such, content spending is expected to increase $6 billion in 2017.
Further, Netflix is focusing on local content that travels pan-regionally or across multiple territories, such as Japanese anime and Turkish dramas. In this regard, it collaborated with Red Chillies Entertainment, the film production company of Indian actor Shah Rukh Khan to show his films globally. Apart from this, the company has also formed strategic partnerships with the likes of TiVo Corp and others.
Though Netflix has a miserable Zacks Industry rank in the bottom 45%, a disappointing Value, Growth and Momentum Style Scoreof F each, and a ballooned P/E ratio of 136.17 compared with industry average of 13.72, it currently retains a Zacks Rank #3 (Hold), suggesting room for upside. Netflix is primed for more growth in the months ahead as it has created an unparalleled lead in the Internet TV business that will likely dominate over the long term.
ETFs to Buy
Investors might want to capitalize on NFLX growth and the upcoming surge in its share price with lesser risk in the form of ETFs. For these investors, we have highlighted four technology ETFs with a higher allocation to Netflix and the potential to be big movers in the coming days.
PowerShares Nasdaq Internet Portfolio (PNQI - Free Report)
This fund offers exposure to the largest and most liquid companies that are engaged in Internet-related businesses by tracking the Nasdaq Internet Index. It holds about 83 stocks with Netflix taking the top spot in its basket with 8.6% allocation. Internet software & services dominates the portfolio with 56% share in the basket, closely followed by Internet & direct marketing at 39.2%. The product has AUM of $282.3 million and trades in a light volume of about 21,000 shares a day. It charges 60 bps in fees per year and has a Zacks ETF Rank of 3 with a High risk outlook.
ARK Web x.0 ETF (ARKW - Free Report)
This is an actively managed fund focusing on companies that are expected to benefit from the shift in technology infrastructure from hardware and software to cloud. The fund holds 37 stocks in its basket with Netflix taking the third position at 5.9% of total assets. From a sector look, Internet & mobile applications make up for 29% of the portfolio while Internet & direct marketing, and software & programming round off the next two spots with 17% and 15% exposure, respectively. The ETF has amassed $16.3 million in its asset base and trades in a paltry average daily volume of under 3,000 shares. The expense ratio comes in at 0.75%.
First Trust Dow Jones Internet Index (FDN - Free Report)
This is one of the most popular and liquid ETFs in the broad tech space with AUM of $3.5 billion and average daily volume of around 491,000 shares. The fund tracks the Dow Jones Internet Composite Index and charges 54 bps in fees per year. Holding 42 stocks in its basket, Netflix occupies the third position at 5.2%. Internet mobile applications account for half of the portfolio while Internet & direct marketing makes up for 21%. The product has a Zacks ETF Rank of 3 with a High risk outlook (read: ETFs to Ride on Amazon's Best Ever Holiday Season).
First Trust Cloud Computing ETF (SKYY - Free Report)
This fund provides exposure to cloud computing securities by tracking the ISE Cloud Computing Index. Holding about 30 stocks in the basket, Netflix takes the second spot at 4.8% of assets. Software firms dominate this ETF accounting for 38.9% share while Internet software services (15.2%) and communication equipment (14.2%) round off to the next two sectors. The product has been able to manage $666.6 million in its asset base while sees moderate volume of about 92,000 shares a day. It has 0.60% in expense ratio and a Zacks ETF Rank of 3 with a Medium risk outlook (read: Catch Cloud with These ETFs).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>