Netflix (NASDAQ:NFLX) stock is down about 2% after it reported earnings yesterday that just missed growth estimates. Earnings came in at 30 cents per share of Netflix stocks against analyst estimates of 24 cents. Subscriber additions were also ahead of projections — by nearly 1 million in the case of international subscriptions. But revenues of $4.19 billion fell slightly short of estimates for $4.21 billion.
More importantly, Netflix’s forecast for the first quarter of 2019, was well below the 82 cents per share of earnings and $4.61 billion of revenue that Wall Street had been projecting. NFLX projects earnings of $253 million, 56 cents per share, on revenue of $4.49 billion.
The selling, however, didn’t quite match the buying of two days earlier, after Netflix announced a 13% price hike, to $13 per month for its most popular viewing plan. That sent shares up 6%.
Netflix Stock’s Story Remains Intact
What matters is that the growth story for Netflix stock remains intact. Although investors are paying a high price for it. At a market cap of $153 billion, Netflix is selling at 121 times earnings, and almost 10x revenue. Even with the predicted doubling of earnings in 2019, you’re still looking at a forward P/E near 82.
What justifies the price is the audience, 80 million households viewed Susanne Bier’s Bird Box, a number that is light years ahead of most broadcast audiences. For comparison 2018’s Super Bowl had 103.4 million viewers.
But Super Bowl numbers are down, and Netflix’ global audience is now 139 million. Even that trend is in Netflix’ favor.
Success, however, has a cost. In response to moves by Comcast (NASDAQ:CMCSA), AT&T (NYSE:T) and Walt Disney (NYSE:DIS) to cut into its U.S. streaming market, Netflix raised its budget for producing new content. NFLX spent an estimated $8 billion on content this year, and analysts expect that to rise to $16 billion in by 2022.
The U.S. price hike, which was not replicated globally, also cuts into the consumer budgets AT&T and Disney are going after. The more money people are already spending on Netflix, the less likely they are to add a second or third streaming channel.
Top directors and producers are flocking to Netflix not just for the money, but for the creative control the service offers.
A May 2018 deal with Barack and Michelle Obama was typical of the sort of unique programming Netflix tends to deliver. The price, somewhere between $65 and $99 million, was higher than the couple earned for their autobiographies and quite high for people who haven’t produced TV before. Total creative control, which Netflix has been giving talent since 2011, should keep it competitive even as rivals ramp up their budgets.
The Bottom Line for Netflix Stock
As I wrote in October, Netflix has become a global presence, while its rivals are just approaching the U.S. market. Netflix stock remains very pricey but it has managed to grow into its ever-higher valuations.
Five years ago, when Netflix shares were at about $60, they were considered expensive by analysts who compared it with HBO. A year ago, at $190, they were considered very expensive by analysts comparing them with Time Warner. They opened for trade January 18 at $352 per share, and you’ll hear the same talk about how expensive they are.
But those who have bought along the way have been richly rewarded. Those who bought Netflix into its bear market bottom of $246, just one month ago, are sitting on gains of 43%.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
