Netflix Shares Setting Up Nicely Into Q2 Results

Netflix, Inc. NFLX will be the first of the internet sector to announce its quarterly earnings — scheduled for July 17, and MKM Partners managing director Rob Sanderson has high hopes.

“Q2 is expected to be slightly better than seasonal, with a strong content line-up in the weakest quarter seasonality-wise,” Sanderson said. “For Q3 we see potential for an upside surprise. Subscriber comps are still skewed by price-related churn, but expectation of flattish q/q U.S. adds and 25% q/q international seems conservative. Netflix remains our top pick for market cap appreciation over the next 2-3 years.”

Sanderson reiterated his Buy rating with a $195 price target.

Watch Out For Subscribers

Typically, Q2 is the weak point for seasonality, and consensus is currently calling for domestic paid net additions to be in line with guidance. Sanderson believes investors should focus more on Q3 outlook.

Original Content Has Helped Drive Subscriber Growth

Sanderson noted how original content has helped lead to more subscribers, especially internationally.

“Hours of original programming are expected to increase by 65%-70% y/y in 2017. Management says the content slate will improve materially in 2H over 1H, as will the impact on subscriber additions. We think the addressable market is still under-estimated,” he said.

Overall Outlook

“Netflix shares have been strong performers YTD (up 21% vs. NASDAQ 14%), but have underperformed since reporting Q1 results, up 2.0% vs. NASDAQ up 5.1%. We like the stock set-up into the 2H and would be long in front of the quarter for the possibility of upside guidance, which we think would provide a near-term boost,” Sanderson concluded.

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