Netflix’s recent earnings report was filled with some really great metrics around subscriptions and revenues, but it also contained some things only whispered.
Here’s the good and bad news…
Thank heavens for the FANG stocks.
Together, along with Microsoft (MSFT) and Apple (AAPL) (or what I’ve called the Tech Big 5 and the New York Times’ Farhad Manjoo calls the Frightful 5), they basically kept the S&P 500 and NASDAQ Composite afloat during 2015, and because of their huge runs, any of the crashing you hear in the markets is tamped down a bit for these guys.
But now it’s earnings season, and Netflix’s (NFLX) report revealed much, both good and bad.
Is it still a buy?
Let’s examine these three cheers and three fears for Netflix and find out…
Netflix Subscriber Growth Soars
Netflix added more new subscribers than anticipated by the market. Their growth came in at 5.59 million new users during the fourth quarter (12/31), ahead of its own forecast of 5.15 million.
Netflix’s new base: Nearly 75 million worldwide subscribers, an almost 30% increase year-over-year on a quarterly basis.
While international subscribers increased dramatically (to 4.04 million from its estimated 3.5 million) U.S. subscription levels waned.
In fact, at 1.45 million new subscribers, Netflix missed its own target by 9 million new users, which was a 20% decline from last year’s quarterly figures.
That is not an insignificant number, particularly as international subscriptions are not as profitable as domestic.
The good news is they expect growth to continue. The tepid news is the growth appears to be overseas. The bad news will be if any of those numbers start to miss.
Netflix Revenue Growth Crushes Expectations
Neflix reported a 22.8% rise in revenue in the quarter-over-quarter, while earnings of 10 cents per share crushed expectations of 2 cents per share. That makes sense given the growth in subscribers, and it’s all well and good.
However, it really wasn’t THAT good.
You see, Netflix actually missed revenue expectations. Analysts were looking for $1.83 billion in revenue, and Netflix came in at $1.82 billion.
Sure, missing a billion here and a billion there is perhaps ‘small beer,’ but it’s still a big number. As was the earnings figure, which actually came in at 9 cents per share below last year’s fourth-quarter performance.
And as Motley Fool’s Adam Levine-Weinberg points out, NFLX’s Q1 2016 earnings are tabbed at around 3 cents per share owing to that growing international footprint over domestic growth.
So congrats on the really nice revenue growth, but let’s be cautious heading into 2016 on the issue, shall we?
Netflix Programming Under Pressure
It’s all about content in the streaming and video space, and nobody can deny that Netflix hits it out the park.
From past hits that keep on paying off like House of Cards and Orange is the New Black, to today’s newest offerings like Unbreakable Kimmy Schmidt and Narcos, Netflix should continue to build a brand that garnered 34 Emmy nominations in the last year.
Program options are, to say the very least, multitudinous. Anything Netflix can do, Amazon will be happy to do better, as will the future Apple TV, along with today’s Hulu and Google.
And, of course, every cable channel on the box has original series programming.
None of this is to suggest NFLX programming is poor, or even that it won’t pump out new series hits every year.
But this is one tough field to compete in, and that won’t change anytime soon.
The Bottom Line on Netflix Stock
Netflix stock is ahead over 112% in the past year, even after it’s 10+% pullback since January 3. With a screaming trailing 364 price-to-earnings, one could suggest it’s a tad overvalued.
Lots of people thought that of Amazon too, however, and Amazon is a far richer, more diverse and longer-standing business model than Netflix.
If you have the stomach for a long-term play based on expected revenue growth eventually ratcheting up earnings (and it’s important to note that NFLX is indeed profitable), Netflix stoc could be a hold for a very long time.
(Marc Bastow is long MSFT and AAPL.)
This post originally appeared on mainstreetinvestor.com.
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