Netflix (NFLX - Free Report) , the world's largest video streaming company, reported first-quarter 2017 results after the closing bell on Monday. While the company’s weaker-than-expected subscriber growth somewhat disappointed investors, its bullish forecast for subscriber addition by mid-year instills confidence in the future growth. Additionally, Netflix topped our earnings estimates while revenue came on par.
Netflix shares initially plunged as much as 3% following the earnings release in after-market trading but rebounded to gain 1.5% to a new all-time high.
Netflix Q1 Earnings in Detail
The company reported earnings per share of 40 cents, a couple of cents ahead of the Zacks Consensus Estimate and up six-fold from the year-ago quarter. Revenues climbed 34.7% year over year to $2.64 billion, in line with our estimate. Most of the strength came from global streaming revenue, which was up 38.8% year over year (see: all the Technology ETFs here).
Netflix added 4.95 million new subscribers globally in the first quarter, falling short of the company’s projection of 5.20 million additions and lower than the year-ago addition of 6.74 million. International accounted for the bulk addition of 3.53 million users while U.S. additions were 1.42 million. This suggests some slowdown in the company’s subscriber growth. However, this looks temporary as growth was hit by the pushing back of the release of the popular original shows like season 5 of “House of Cards" and “Orange is the New Black” as well as other programs to the second quarter from the first.
The company released several new shows during the reported quarter including the kid-oriented “A Series of Unfortunate Events”, Drew Barrymore's zombie comedy “Santa Clarita Diet”, the reality series “Ultimate Beastmaster”, the superhero-themed “Marvel’s Iron Fist”, a second Mexican series “Ingobernable”, and the millennial-focused dramatic series “13 Reasons Why”. Additionally, the debut of “Dave Chappelle: Collection 1” proved to be Netflix's most-viewed comedy special ever.
Notably, the video streaming giant reached 98.75 million subscribers globally in the quarter. It is on the verge of surpassing 100 million in the days ahead, may be this weekend, indicating its continued dominance in the global streaming media market.
In the ongoing Q2, the company expects to add 3.20 million subscribers, including 0.6 million in the U.S. and 2.6 million internationally. Earnings per share are expected to be 15 cents, which is below the current Zacks Consensus Estimate of 23 cents.
Solid 2017 Outlook
The online video streaming giant is deeply focused on growing global operating margin with a target of 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 run.
The company continued to focus on original content strategy and plans to spend $6 billion (up from $5 billion last year) to ramp 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, Stranger Things Season 2 and more Marvel series like The Defenders. Notably, Marvel has been on a winning streak for the past eight years since Iron Man hit cinemas (read: 5 Hottest Tech ETFs of 2017).
Further, Netflix is focusing on local content that travels pan-regionally or across multiple territories, to include Japanese anime and Turkish dramas. It is also looking to release its films in theaters after releasing online. In this regard, the company is seeking support from large theater chains such as AMC and Regal in the U.S. for the Will Smith starrer Bright, scheduled to release in theaters and on Netflix in December.
Though Netflix has a miserable Zacks Industry Rank in the bottom 33%, a disappointing Value, Growth and Momentum Style Score of F each, and an inflated P/E ratio of 132.66 compared with the industry average of 13.89, it currently carries a Zacks Rank #3 (Hold), suggesting room for upside. Netflix is primed for 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 five 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 90 stocks with Netflix taking the fourth spot in its basket with 7.93% allocation. Internet software & services dominates the portfolio with 54.8% share in the basket, closely followed by Internet & direct marketing at 38.8%. The product has AUM of $313.3 million and trades in a light volume of about 20,000 shares a day. It charges 60 bps in fees per year and has a Zacks ETF Rank of 3 with a High risk outlook.
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 $4 billion and average daily volume of around 430,000 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 5.4%. Internet mobile applications account for half of the portfolio while Internet & direct marketing makes up for 20%. The product has a Zacks ETF Rank of 3 with a High risk outlook (read: What Made Internet ETFs Outperform in the Bull Market).
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 top spot at 5.01% of assets. Software firms dominate this ETF accounting for 40% share while Internet software services (14.1%) and communication equipment (13.6%) round off the next two sectors. The product has been able to manage $784 million in its asset base while sees good volume of about 120,000 shares a day. It has 0.60% in expense ratio and a Zacks ETF Rank of 3 with a Medium risk outlook.
Aptus Behavioral Momentum ETF (BEMO - Free Report)
This product seeks to offer exposure to the 25 large U.S.-traded equity securities by tracking the the Aptus Behavioral Momentum Index. Of these, Netflix takes the fifth spot with 4.12% of assets. From a sector look, technology accounts for the largest share at 30%, followed by double-digit exposure each in financials, industrials, healthcare, and consumer discretionary. The ETF charges 79 bps in fees per year and trades in volume of 7,000 shares a day.
Global X Millennials Thematic ETF (MILN - Free Report)
This fund seeks to invest in companies that have a high likelihood of benefiting from rising spending power and unique preferences of the U.S. Millennial generation (birth years ranging from 1980–2000). It follows the Indxx Millennials Thematic Index, holding 72 stocks in its basket with Netflix occupying the fourth position at 3.85%. It has accumulated $4.1 million in its asset base and trades in a meager average daily volume of about 3,000 shares. Expense ratio comes in at 0.50% (read: 5 Millennial Friendly ETF Investing Ideas).
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