Netflix, Inc. (NASDAQ:NFLX) was the S&P 500’s best-performing stock last year, with a roughly 130% gain in 2015. But NFLX stock has lost about 20% since its December highs as investors have started to worry about whether this streaming video giant has run up too much, too fast.
So as Netflix earnings approach on Tuesday, Jan. 19, 2016, investors will be paying close attention to see if the growth story still holds.
And given the company’s forward price-to-earnings ratio of more than 400 based on projected earnings of just 25 cents in fiscal 2016 … the results could be disastrous for NFLX stock if it falls short.
Netflix Earnings Preview – The Stakes Are High
Traders should be very cautious around Netflix earnings, because part of the reason that shares have been soft since December are fears that growth overseas isn’t going as well as hoped.
According to reports, the company’s chief content officer called overseas expansion rather difficult, and that the “politics” of international content licenses is kind of a pain.
That’s not what investors wanted to hear, and shares of NFLX have been off ever since. Content costs remain a top concern for traders, given that low membership fees could easily be eroded by even a modest increase in licensing. NFLX stock has tried to take strides to keep wraps on these costs, including an ambitious entry into original programming over the last few years via shows like House of Cards and Orange is the New Black.
However, the issue is far from resolved.
Yes, revenue is rising nicely. And overall, costs continue to rise at a slower rate than sales. However, the international segment remains a big sticking point … most notably because costs are not under control in this segment, and operations are still running at a loss.
A look at the following table, gleaned from company financial statements, shows that while revenue growth is brisk overseas, Netflix continues to see costs rise even faster than any pace of sales growth.
A profitable U.S. business and low content costs thanks to original programming and shrewd negotiations with producers have paid dividends … but where is growth going to come from in the future, as domestic streaming matures and international growth remains to come at a big price tag?
This is the billion-dollar question for NFLX stock holders, and they’ll be looking closely at these international growth metrics and costs of content to figure out the path forward.
This is a classic case of expectations, since Netflix as a publicly traded stock has become a victim of its own success. The original programming it produces is critically acclaimed, users are enthusiastic supporters of the company and there is little doubt that it will remain a standard among streaming video providers for some time.
But all that matters little come earnings season, when investors are looking at Netflix to justify its incredible earnings multiple and assuage concerns about international growth that may not deliver on the bottom line — even if it is creating an ever-larger user base.
The good news, if you’re looking for it, is that short interest declined slightly in the final weeks of 2015 — even after that nasty December report about content challenges. Although levels are still elevated, with about 4.5 days worth of trading required to cover the roughly 48 million shares held short, they are at least down slightly from mid-December.
Personally, I think that’s more due to an overall flight from the market at large than the bears giving up their take on NFLX stock.
I would tread very cautiously as Netflix earnings approach, because a big decline could be coming.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks.Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
