Netflix Expected to Report Higher Earnings

Risks include costs of content and international expansion
Author:
Publish date:
BeverlyHills_04.jpg

Netflix is expected to show improved earnings and continued subscriber growth when it releases its financial reports for the fourth quarter after the close of the stock market Wednesday.

Wall Street consensus is that earnings will rise to 13 cents a share from 7 cents a share a year ago.

Revenues are expected to be $2.46 billion, up from $1.82 billion a year ago.

With Netflix, analysts are looking to see the rate of subscriber growth, how much profit Netflix is able to generate from its U.S. subscriber base and how quickly it can turn its international expansion, which is now generating financial losses, into earnings.

Mark Mahaney, analyst at RBC Capital Markets, rates Netflix as outperform and expects the company to meet its financial guidance.

He expects Netflix to report having added 1.46 million subscribers in the fourth quarter, a slightly bigger number than the Wall Street consensus, and 3.75 million net new international streaming subs, in line with the company’s estimates.

Mahaney estimates that domestic streaming profits will grow by 36%, while international losses ramp up to $75 million from $69 million in the third quarter driven by costs to launch the service in new markets and for creating localized content.

“We believe that Netflix has achieved a level of sustainable scale, growth, and profitability that isn’t currently reflected in its stock price,” Mahaney said in a recent report.

On the upside, Netflix is rolling out new original content, which should keep churn down. It has also shown evidence that it does not lose a significant number of subscribers if it raises prices, he said.

The risks on Netflix include higher-than-expects cost to launch in new markets, rising content costs and increasing competition from Amazon, Hulu, YouTube and others, Mahaney notes.

Analyst Rich Greenfield of BTIG Research, says he’s interested in hearing an update on global streaming hours and their growth rate, particularly in international markets.

He will be listening for thoughts on whether Netflix is benefiting from being integrated into set-top boxes or if it is risking its direct relationship with subscribers by working with cable and satellite operators.

Greenfield also wants to know if Netflix can improve its movie inventory.

Greenfield raised his target price for Netflix to $170 a share as he increased his estimates for streaming subs, revenues and earnings per share for 2017.

“Netflix’s content spend is accelerating gross adds globally and reducing churn, the end result being higher than expected net add forecasts,” he said in a blog post Tuesday.

He forecasts 2016 earnings per share to be 40 cents a share and 2017 EPS to be $1.06. He lowered his outlook for 2018 earnings to $2.12.

Related