Shares of Netflix (NFLX - Free Report) have tracked the S&P 500 over the last six months after they skyrocketed to start 2019. Now, with the streaming giant set to face a market full of entertainment heavyweights, let’s look at what to expect from its upcoming Q2 financial results to see investors should buy NFLX or stay away.
Just a few weeks after news broke that NBCUniversal (CMCSA - Free Report) grabbed the domestic streaming rights for The Office from Netflix for its yet-to-be-launched streaming service, WarnerMedia announced Tuesday that Friends will leave the streaming platform in 2020. Both hit sitcoms are set to play key roles for their respective platforms just as they did for Netflix, which could be part of a much more worrisome problem.
The Office is currently Netflix’s No. 1 show, according to Nielsen data. In fact, eight of the 10 shows that U.S. subscribers spent the most time watching last year were reruns, including Friends. Overall, library programming, which includes TV reruns licensed from other studios, accounted for 72% of total viewing minutes.
Netflix clearly knew that companies would pull their content and start their own services. This is why Reed Hastings’ firm has spent billions of dollars on its own original content in recent years.
Netflix’s head start helped it amass 148.86 million paid streaming memberships. This staggering figure marked 25% growth—for the fifth straight quarter—from Q1 2018. It is also worth noting that some of Netflix’s original programming has been well received and critically acclaimed. But the company’s ability to create its own The Office-style shows, which keep users hooked for hours, seems paramount going forward.
Netflix’s standard plan currently costs $12.99 per month, with its four-screen premium offering at $15.99. Amazon (AMZN - Free Report) Prime ($12.99/month) is currently said to claim roughly 100 million subscribers, even though it’s not clear how many people utilize the Prime Video service, and not just the shipping deals. Hulu (ad-free version $11.99)—now controlled by Disney—has also grown recently and last posted 28 million users.
Looking ahead, AT&T (T - Free Report) is set to launch HBO Max—where Friends will live—for between $15 and $18 a month early next year. Disney (DIS - Free Report) will debut Disney+ in November at a $6.99 a month price point. Meanwhile, NBCUniversal’s streaming product will be free for pay-TV subscribers and roughly $10 for cord cutters. Apple (AAPL - Free Report) is also set to launch its own stand-alone streaming services this fall.
Disney+ will feature both new and old movies and TV shows from arguably the biggest brands in entertainment: Disney, Pixar, Star Wars, Marvel, and National Geographic. Apple TV+ will feature A-list Hollywood stars both in front of and behind the camera. And HBO set the standard for premium TV.
Now that we have a sense of where things stand and who is set to enter the fray, let’s look at what to expect from NFLX’s Q2 results and beyond. Netflix executives expect to grow its global paid membership base by roughly 24% in Q2 to close at 153.86 million.
Meanwhile, our current Zacks Consensus Estimate calls for the company’s second-quarter revenue to jump 26.1% to $4.93 billion, which would top Q1 2019’s 22.2% top-line expansion. It would, however, mark a significant slowdown from the year-ago period’s 40% revenue growth. Peeking further ahead, NFLX’s full-year fiscal 2019 revenue is projected to jump roughly 28% to reach $20.18 billion—the firm’s fiscal 2018 revenue surged 35%.
At the bottom end of the income statement, the company’s adjusted Q1 EPS figure is projected to sink 34% from $0.85 per share in the prior-year quarter to $0.56 per share. Plus, this Q2 estimate fell all the way from $0.90 before the Netflix reported its Q1 results.
Overall, the company’s adjusted fiscal 2019 earnings are projected to pop 25% to $3.35 per share, with fiscal 2020’s figure expected to soar 75% higher than our 2019 projection. Netflix has also crushed our quarterly earnings estimates by an average of 24% over the trailing four periods.
But all of these estimates fell dramatically following its Q1 release as the firm continues to spend on new content. This is why some on Wall Street have grown increasingly concerned about the streaming firm’s growing debt levels.
Netflix is trading at 81.6X forward 12-month Zacks earnings estimates at the moment, which represents a massive premium compared to its industry’s 19.5X average and fellow growth-focused Amazon’s 61.7X. The company’s forward price/sales ratio of 7.3 also more than doubles AMZN. Netflix is currently a Zack Rank #3 (Hold) based on its recent earnings estimate revisions activity and faces a much more crowded road ahead.
Investors should understand that there are some long-term risks for Netflix, especially if its international expansion doesn’t go as smoothly as planned. Netflix is still likely to be a successful company for years to come and could be a solid pick for investors to play the streaming market. With all that said, NFLX has traded pretty heavily around earnings. So, beware about buying the stock on a earnings play, since a membership miss could send the stock tumbling.
Shares of NFLX are up 43% in 2019 and opened at $381.10 Thursday, down about 10% off its 52-week intraday highs. The company is set to report its Q2 fiscal 2019 financial results on Wednesday, July 17.
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