Stock of the day 14/07/2016 – Netflix Inc

Will investors be streaming in to buy Netflix after the company reveals its second quarter figures next Monday?

It hasn’t been the smoothest year for the media giant. Having opened 2016 at $108.94 Netflix had quickly sunk to $79.32 by the end of the first week of February, its worst price since the 7-for-1 stock split last July. From that nadir Netflix aggressively climbed back to $110 by the middle of April, only for first quarter earnings woes to knock the stock lower once again. From then on Netflix was at the mercy of the wider market movements, nearing $104 by the end of May only to plunge to $85 in the aftermath of the UK’s EU referendum; the stock now sits at a current trading price of $96.39 (IT-Finance.com, 14/07/2016).


(Source: IT-Finance.com 14/07/2016)

Taking a look at Netflix’s 2 earnings reports this year helps shed light on why the stock has had such a choppy time of it. Despite the wider market turbulence dragging down its stock price back in January things were still looking very perky for Netflix. As the New Year began the company launched its streaming services in 130 new countries, including India, South Korea, Turkey and Poland. A few weeks later Netflix followed this up with a strong fourth quarter update; although adjusted earnings per share fell to 7 cents from 10 cents year-on-year revenue rose by 22% to hit $1.82 billion. Even better was the company’s subscription growth figures; Netflix added a better than expected total of 5.59 million new net subscribers, 4.33 million of which came from outside of the US.

Investors were understandably impressed, even if it wasn’t enough for Netflix to avoid an early in the year decline. Flash-forward to April, however, and Netflix fell afoul of its own high bar with its first quarter figures. The actual Q1 numbers were all strong: a 24% rise in revenue to $1.96 billion (a tad lower than expected) and a better than forecast EPS of 6 cents was joined by a 6.74 million increase in subscribers. Yet it was the company’s second quarter projections that caused Netflix to plunge over 15% in the space of 2 trading sessions. It now expects to add 500k US subscribers and 2 million internationally across Q2; while the former figure was only a minor revision, the latter number is 1.45 million lower than Netflix’s initial estimate, and was the main catalyst for investors’ ire.

In terms of the company’s Q2 figures, then, the reaction will hinge on how close Netflix’s subscription figures are to those forecasts announced back in April. EPS and revenue will, of course, have a role to play in its market movements; subscription growth, however, will provide the real juice for its post-report performance, especially with analysts highlighting Netflix’s increasing competition from the likes of Amazon (worldwide) and Hulu (in the US).

Netflix Inc has a consensus rating of ‘Buy’ with an average target price of $124.27.