It’s safe to say that most investors prefer not buying equity in a company that’s already enjoyed massive success. However, many of those same investors are clearly giving Netflix (NASDAQ:NFLX) a pass. And why not? Its tremendous rise reflects the justified premium of routinely exceeding expectations. In some circles, the upcoming NFLX stock earnings report is merely a coronation of the obvious.
The issue, though, is that even the best names eventually suffer the inevitable correction. Anyone who isn’t emotionally and financially vested in the streaming-media firm can see that NFLX stock is overheated. Just prior to its second-quarter fiscal 2018 earnings report, shares hit triple-digits against its January opener. For context, NFLX returned nearly 54% last year.
Of course, these standout performances are what raises eyebrows today. The last time Netflix hit a low point in the markets was in 2014. Even then, I can’t call a 6.4% loss devastating, as NFLX delivered over 37% returns the following year.
As our own Joseph Hargett points out, while most analysts are bullish, some have increasingly felt the heat. For instance, UBS analyst Eric Sheridan downgraded Netflix to “neutral” from “buy.” He’s not the only one, joining 13 other fence-sitters prior to the NFLX stock earnings call.
The apprehension is understandable. But Hargett points out that “subscriber growth will, once again, be the big story for Netflix.” He further noted:
“Analysts are worried that the U.S. market may be oversaturated, and that geopolitical issues will slow international growth. Netflix is currently in roughly 56% of U.S. broadband households and 46% of total U.S. households. Internationally, Netflix’s subscriber base is growing rapidly in India and elsewhere.”
Can the NFLX stock earnings report live up to heightened expectations?
The NFLX Stock Earnings Report Can Realistically Hit Its Target
For the second quarter, the consensus estimate for Netflix’s earnings per share is pegged at 79 cents. This is near the upper level of forecasts, which range from 71 cents to 85 cents. In addition, it’s a massive leap from Q2 2017, when analysts expected (and ultimately received) a 15-cent EPS target.
On the revenue front, analysts forecast that the company will deliver $3.9 billion. The estimate spectrum is much tighter for sales, ranging from $3.9 billion to $4 billion. What’s notable here is the disparity against the prior-year quarter, where NFLX hauled in $2.8 billion.
If everything goes according to plan, the company is looking at 39% year-over-year growth. That’s an almost-unheard-of statistic for an industry leader, and one allegedly fighting in a saturated market.
Going into Netflix’s latest earnings conference call, bearish traders cited concerns about the shares’ excessive momentum. I don’t take any issue with this reasoning. No publicly traded company is correction-proof. Plus, Netflix has more than demonstrated choppy or volatile trading in the past.
But it’s also difficult to dismiss the astounding, but very real progress Netflix makes against increasing challenges. In the last NFLX stock earnings report, the streaming company amassed 125 million subs worldwide. That represented 6.3% sequential growth (from Q4 2017), along with a massive 26.6% year-over-year growth.
I just don’t see Netflix losing in this department. Since Q3 2011, sequential growth averages 6.8%. On a YOY basis, we’re seeing a 30% average. Although growth has dipped in recent years, it has done so slightly.
Management expects total subs to jump to 131.2 million. That’s a 26% YOY lift from Q2 2017, which is well within reason. The actuals could even be a little higher than that.
Netflix Enjoys an Unstoppable Trajectory
Prior to the earnings drama, the biggest takeaway I received was from their leadership team. In a corporate statement about their longer-term strategies, Netflix bluntly wrote: “In a few decades, linear TV will be the fixed-line telephone: a relic.”
You should always take a company’s opinion about itself with a huge grain of salt. Nevertheless, I must give credit where credit is due. The last NFLX stock earnings report unquestionably proved that sub growth is still robust. However, within that top-line picture is an underlying reality: traditional media is becoming increasingly irrelevant.
Consider that out of the top 20 trending TV shows in 2018, Netflix’s programs occupy three slots. Additionally, Amazon’s (NASDAQ:AMZN) The Grand Tour ranks 18th. For Netflix, its most popular offering is Stranger Things, with an estimated 12.9 million daily viewers, according to Insider’s total-audience demand metric, which adjusts for country-population size.
Stranger Things is the second-most popular show in the world. This puts it above renowned fare like AMC Networks’ (NASDAQ:AMCX) The Walking Dead, and CBS’ (NYSE:CBS) The Big Bang Theory. The only program that resonates more with fans is Game of Thrones.
This is like Croatia losing to France in the World Cup final. There’s absolutely no shame in it.
I’d call it a warning against the entertainment-media establishment. Netflix is not just winning in the raw numbers, but also in user engagement. Eventually, future NFLX stock earnings reports will reveal just how much of a relic tethered TV has become.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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