Shares of Netflix (NFLX - Free Report) have fallen over 20% in the past three months as Wall Street worries about the streaming TV firm’s subscriber growth, debt load, and its ability to remain dominant in a market that will soon feature Apple (AAPL - Free Report) and Disney (DIS - Free Report) .
The Quick Binge
Netflix, as many people around the world know, operates a streaming TV service that allows users to watch an array of TV shows and movies whenever they want. Netflix executives have also understood for years that the big media firms and cable giants would eventually roll out their own streaming platforms and pull some of their high-value content.
This is why NFLX has spent billions of dollars on its own original programming for years. Going forward, the company might have to pour even more money into content in a streaming battle that is just starting. Investors need to pay close attention to the fact that Netflix will see three of its most-watched shows, The Office, Friends, and Parks and Recreation, all leave its crowded U.S. library over the next few years for soon-to-be-rival platforms.
According to Nielsen data,The Office is Netflix’s No. 1 show, while library programming, which includes TV reruns licensed from other studios, accounted for 72% of total viewing minutes last year. This is why Netflix recently landed the streaming rights for Seinfeld, for a figure that is said to be over $500 million.
The world’s largest streaming TV company will continue to pay for the rights to popular movies and shows when it can. More importantly, NFLX might one day have to prove that its own original content can be enough.
Netflix claimed 151.56 million paid subscribers around the world at the end of the second quarter. Its closest rival in terms of raw size is Amazon (AMZN - Free Report) Prime, which reportedly claims over 100 million users, though it is not clear how many people use the free Prime Video service yet (which is likely bad for NFLX as Amazon has pursued live sports rights, big-name stars, and properties). Meanwhile, Hulu (now controlled by Disney) last reported 28 million users.
Speaking of, Disney+ will debut on November 12 at $6.99 per month. This is part of the entertainment conglomerate’s massive streaming push that includes ESPN+ and vital Fox properties. Apple will roll out Apple TV+ on November 1 for $4.99 per month.
As it stands, Netflix’s premium plan costs $15.99, while HBO Go runs (T - Free Report) $14.99, and Amazon Prime costs $12.99—which comes with shopping and shipping perks. Comcast (CMCSA - Free Report) will also introduce a streaming service under its NBCUniversal unit in 2020.
Worries & Fundamentals
For all the details we have discussed so far, the main driver of NFLX stock is user growth. Netflix missed big last quarter, which caused its post Q2 selloff. The company added only 2.7 million paid memberships, well below management’s 5 million forecast. This isn’t the first time Netflix missed its own subscriber estimates, but it did represent the biggest miss in the past four years.
On the bright side, NFLX has crushed its quarterly user growth estimates by roughly one million following a miss in each of the past three quarters. Unfortunately, this could mean that Wall Street might have already priced in a big Q3 subscriber beat—NFLX expects to add 7 million paid users in Q3 to reach 158.6 million.
Despite Netflix’s downturn, the company is still trading at 54X forward 12-month Zacks earnings estimates. This marks a discount compared to its own two-year high and comes in below AMZN’s 56X but it might still be too rich a price to pay for a far less diversified and dynamic company than Amazon. In terms of forward sales, NFLX’s 5.1X comes in below its own two-year high of 10X but trades far above AMZN’s 2.6X.
Wall Street might not care about NFLX’s valuation picture yet, as it is the only pure-play streaming TV bet on the market, aside from Roku (ROKU - Free Report) . The firm’s growing debt load might be. Netflix had negative cash flow in Q2 and projects it will be –$3.5 billion for fiscal 2019. Executives also said that the near-term plan is “still to use high yield debt to fund our content investments.”
Q3 Outlook & Beyond
Moving on, our Zacks Consensus Estimates call for Netflix’s Q3 revenue to pop 31.3% to reach $5.25 billion. This would top Q2’s 26%, Q1’s 22%, and Q4 2018’s 27%. However, these three periods already marked slowdowns from what had been an extended run of 30% or better sales growth for a few years.
The firm’s full-year fiscal 2019 revenue is then projected to jump 28%, with 2020 expected to come in 24% above our FY19 estimate. These would both represent slower expansions than 2018, 2017, and 2016.
NFLX’s adjusted Q3 earnings are projected to expand 18% to hit $1.05 per share. Overall, the company’s fiscal 2019 EPS figure is expected to climb 21.3%, with fiscal 2020 projected to come in 77% higher.
NFLX is a Zack Rank #4 (Sell) at the moment based on its longer-term negative earnings revisions. Shares of Netflix do rest around 26% below their 52-week highs.
Therefore, the beaten-down stock might jump when it posts its Q3 results on Wednesday, October 16. Alternatively, Netflix shares could tumble further if it doesn’t post a significant subscriber beat.
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