Earnings

Here’s What to Expect From Netflix, Inc. (NFLX) Q2 Earnings

Here's What to Expect From Netflix Q2 Earnings
The US streaming giant Netflix had a rocky couple of months as investors focus on its growth potential in the US and overseas

US streaming giant Netflix, Inc. (NASDAQ:NFLX) is scheduled to report its second quarter earnings for fiscal 2016 (2QFY16) on July 18 after the closing bell. Analysts and investors have been waiting for Netflix earnings to see whether the giant streaming service provider will be able to post solid subscriber numbers for the current quarter or not.

Stock History

Netflix is one of the most volatile stock on S&P 500 index. Governing at the price-to-earnings multiple of 340x, the stock is not cheap at all. After studying streaming giant's earnings for the past five years, we noticed that out of 21 quarters, Netflix has missed analysts’ earnings estimates seven times, while it managed to surpass Wall street analysts’ expectations in 14 quarters.

When a company misses its quarterly earnings, its shares trend in a negative direction following the news. However, this is not always the case with Netflix stock. Of seven below-expected earnings, stock moved in the upward direction thrice. However, we have observed that the stock rise after the US streaming service provider announced higher-than-expected subscription growth.

On the other hand, of 14 cheerful earnings, stock dropped six times. Our observation tells that the stock has fallen after earnings whenever the company reports lower-than-expected earnings guidance.

Hence in this quarter, even if the Netflix will report lower than the forecasted earnings, its shares might rally if the media giant reports stronger subscription growth.

Earnings History

According to the last quarter performance of the streaming market leader, it has shown better-than-expected earnings results.

In the last reported quarter (Q1FY16), the giant media company reported earnings per share (EPS) of $0.06, which was higher than analyst forecast of $0.04. Following the earnings release, stock went down more than 12%.

According to the streaming giant, it added 6.74 million subscribers during first quarter. The total subscription has now reached to 81.5 million subscribers. The net subscriber’s addition includes 2.23 million subscribers in domestic market and 4.36 million subscribers in the international market. This growth was mainly driven by the company’s massive roll-out earlier this year into 130 international locations.

Earnings Prediction

For the 2Q, street analysts anticipate the EPS of $0.02. Analysts’ estimates that the company will report revenue of $2.1 billion. In last one year, the company has constantly revised its guidance. For the third quarter, analyst anticipations are somewhat higher, with earnings prediction of $0.07 per share on revenues of $2.26 billion.

Wall Street analysts are all concerned regarding the subscriber additions. Back in April, the company reduced subscriber additions guidance for this quarter. Netflix has guided additions to 2.5 million subscribers for this quarter, out of which two million additions are predicted to come from its international operations, as compared to 2.37 million a year ago and the remaining 500,000 from its domestic market.

Analysts Perception

Just ahead of earnings, different research firms gave their views on the streaming company. In a recent research note to its clients, analyst Doug Mitchelson at UBS slashed his target price on Netflix stock from $141 to $130. However, the analyst maintained his Buy rating on the stock as research firm’s Evidence Lab reveals mixed subscriber trends.

The analysis by Evidence Lab on Netflix App downloads for the second quarter reveals that there is a slowdown in Southern Europe, Germany, and France, while there is growth throughout Americans and Nordics. The analysis also showed stability in the UK, Australia, and Japan.

As per the analyst, the trend seem to be consistent with his second quarter estimates and he is reiterating US net additions estimate at 500,000 as compared to 903,000 in the same quarter a year ago. He also maintains two million international net additions as compared to 2.37 million in the same quarter a year back. This reduction is because of larger subscriber base and increase in churn rate along with price changes.

For the third quarter, the analyst slashed his international net addition expectations by 836,000 to 2.6 million, reflecting a drop of nearly 5% on year-over-year (YoY). According to the analyst, the reason behind this fall is the disruption in the UK due to Brexit. The analyst also predicts a much wider effect from the Olympics in August in Brazil, which has remained one of the leading contributors of international growth. Additionally, the upcoming quarter will be challenged by carryover churn from the second quarter price hike. However, it might also benefit from seasonality and greater production of original contents.

Likewise, the research firm reduced its international subscribers by 164,000 to 3.891 million YoY decline of 4% as the fourth quarter “faces tough south Europe and Japan launch comps, but more original content releases.”

On the other side, analyst Michael Nathanson at Moffett Nathanson believes that there is an upside surprise in overall international subscribers in second quarter due to streaming giant’s full global expansion. According to the analyst, implied net subscriber numbers could fall between 2.2 million and 2.7 million, which is well above management’s anticipated number of two million. After looking at the previous ratios, the company’s implied net addition could fall in the range 530,000-885,000 domestically, as compared to guidance of 500,000.

According to the analyst, the streaming giant is all set to surpass the international subscribers this quarter which could drive a rally. However, in the research report, Mr. Nathanson mentioned that he is “hesitant to reward international operations with the same valuation as the domestic business and reiterates the Neutral rating and $85 target price.”

Conclusion

Though Netflix reported disappointing domestic subscription growth, it had shown quite impressive growth internationally. Hence for the second quarter, we believe that the streaming giant is looking forward to report better-than-expected international subscriber growth as compared to its domestic subscriber numbers.

Hence, if the company successfully reports higher subscriber numbers for the second quarter, this could make the stock surge up.

Last year, Netflix has been the top performing stock at the S&P 500 index. However, year-to-date, the stock is down more than 15%. However, it does not seem that the company will remain the top performing stock this year. This is because though it is trying to increase its subscriber growth with the help of its exclusive content, many analysts believes that its domestic market growth has pretty much capped out while the company faces challenges in its international markets such as Indonesia and South Korea.

For more information regarding Netflix's financial highlights, refer to our Data Analytics section here.

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