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Buy Netflix on Earnings Growth with NFLX Stock Up 35% in 2019?

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Netflix (NFLX - Free Report) shares have surged 35% this year as the company looks to race back toward its summer 2018 highs. The streaming firm currently boasts more subscribers than rivals Amazon (AMZN - Free Report) and Hulu. And even though the streaming entertainment market is set to become more competitive, BMO Capital Markets analysts see Netflix as a top tech stock.

Recent News

BMO Capital Markets analysts voiced their concerns Friday about the potential government shake-up of some of the biggest tech companies on Wall Street. Momentum might be growing, with politicians on both sides of the aisle, openly talking about breaking up the likes of Facebook (FB - Free Report) , Google (GOOGL - Free Report) , and Amazon.

Netflix has, however, been notably left out of most of these discussions, which could work out in its favor down the road—if government intervention were to occur. “We continue to seek out how the legal path might progress for these types of actions, but in the short term, we think it’s appropriate to move Netflix to Top Pick and Amazon to No. 2,” BMO analyst Daniel Salmon wrote in a note to clients Friday.

“We have less confidence in the subject being a wall of worry to climb and instead increasingly clouding the fundamental thesis for Amazon. Netflix, on the other hand, faces little to no regulatory risk, in our view; thus, we are more comfortable with it in the Top Pick slot at the moment.”

Company Overview

Looking ahead, Netflix expects to add 8.9 million paying subscribers during the first quarter of 2019, which would see it hit 148.16 million. As a non-ad supported platform, user growth will remain the main driver of Netflix’s overall revenue growth for years to come, unless it expands or changes its business model. Investors should also note that Credit Suisse recently said that the market “is embedding that NFLX will achieve 335 million subscribers by 2028.”

Netflix’s international business is likely to play a key role in its overall subscriber growth as the U.S. market becomes more saturated. The streaming service is already available in over 190 countries, with China the only untapped market of any real significance. Netflix has said that it “continues to explore options for providing the service” in China, but it will likely find it hard to penetrate the market given the country’s censorship concerns. 

Investors should note that Netflix reported negative cash flow of $1.3 billion in Q4, which brought its full-year total to negative $3 billion. Looking ahead, company executives expect to report a similar level of negative cash flows in 2019 and then “meaningfully improve that trajectory going forward.” Netflix has, of course, committed to spend billions of dollars on new original content, which has driven up its debt load, in order to compete long-term with Amazon, Disney (DIS - Free Report) , Apple (AAPL - Free Report) , AT&T (T - Free Report) , and even Facebook and YouTube.

Outlook

Looking ahead, Netflix’s first quarter fiscal 2019 revenue is projected to jump 21.3% to hit $4.49 billion, based on our current Zacks Consensus Estimate. This would mark a slowdown from last quarter's 27.4% top-line expansion. Meanwhile, the company’s full-year 2019 revenue is expected to surge 27.7% to reach $20.17 billion. This would also represent a downturn from last year’s 35% revenue growth, as top-line expansion becomes harder to achieve.

At the bottom end of the income statement, NFLX’s adjusted Q1 earnings are projected to dip 9.38% to reach $0.58 per share. Despite the negative near-term outlook, investors will likely be pleased to see that the streaming firm’s adjusted earnings are projected to soar 51% to reach $4.05 a share. Plus, Netflix’s full-year 2020 earnings are expected to skyrocket roughly 60% above our current year estimate to reach $6.46 per share.

Bottom Line

BMO’s confidence in Netflix, at the expense of rival Amazon, helped send NFLX stock up over 0.74% during regular trading Friday to close at $361.46 a share. As we touched on at the top, shares of Netflix are now up 35% this year, but still sit over 15% below their 52-week high of $423.21 a share. This gives NFLX stock plenty of room to run despite its climb.

Netflix is currently a Zacks Rank #3 (Hold) based somewhat on its earnings estimate revision trends. The company itself boasted roughly 10% of total television screen time in the U.S. last quarter. Going forward, the firm is set to roll out more movies and TV shows that feature A-list Hollywood stars, along with unscripted programming and international offerings.  

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