Netflix Earnings Preview: International Subscriber Growth In Focus

Netflix, Inc. NFLX reports first-quarter earnings after the closing bell on Monday, Apr. 16. The stock has had quite a run in 2018, starting the year at $196.10 and closing at $311.65 on Friday.

As U.S. subscriber growth has slowed, analysts have increasingly focused on international subscriber growth. Historically, NFLX’s first quarter has been a slower one for subscriber additions, although management’s forecast for Q1 2018 would be higher than the first three quarters of 2017, only falling short of Q4 2017’s numbers.

In Q4 2017, net subscriber additions in the U.S. increased by 1.98 million and 6.36 million internationally, totaling 8.3 million. For Q1 2018, Netflix management is forecasting 6.35 million net subscriber additions, 1.45 million from the U.S. and 4.9 million internationally.  

NFLX management views its original content as one of the main drivers of subscriber growth. As international subscriber growth has picked up, the company has increasingly produced original series for specific international markets and said it’ll expand this initiative by producing more than 30 international original series this year. For all of 2018, NFLX said it plans to spend $7.5 billion to $8 billion on content. It  has also said it is planning on upping its marketing spend to roughly $2 billion in 2018.

Since it is not cash flow positive, NFLX has relied on debt to finance content production and the overall business. When it last reported, the company said “we anticipate continuing to raise capital in the high yield market.” Moody’s, the credit-rating agency, recently upgraded the company’s rating from Ba3 to B1 with a stable outlook. While that is an improvement, it’s still a speculative rating and several steps below what Moody’s considers “investment grade”.

NETFLIX SINCE START OF 2018. NFLX has had a substantial run since the start of 2018 and is up just under 54 percent year-to-date. The stock is still a little short of its all-time high of $333.98. The bottom chart shows the stock’s implied volatility, which is the highest it’s been so far this year and quite a bit higher than when NFLX last reported on Jan. 22. Chart source: thinkorswim^® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Netflix Earnings

NFLX is expected to report adjusted EPS of $0.63, up from $0.40 in the prior-year quarter, on revenue of $3.7 billion, according to third-party consensus estimates. Revenue is projected to increase 39.8 percent year over year. The $0.63 adjusted EPS estimate is the same as NFLX’s forecast, while the revenue estimate is slightly above the company's forecast for $3.6 billion.

Management views operating margin as its primary profit metric and they are forecasting 9.8 percent operating margin in Q1 2018, up from 7.5 percent in Q4 2017. For all of 2018, management said they are targeting 10 percent. 

Netflix Options Trading Activity

Options traders have priced in an 8.8 percent stock move in either direction around the upcoming earnings release, according to the Market Maker Move indicator on thinkorswim® platform. Implied volatility was at the 85^th percentile as of this morning.

In short-term trading at the Apr. 20 monthly expiration, calls have been active at the 315 and 320 strike prices. On the put side, trading has been heavier at the 300 and 310 strike prices.

At the May 18 monthly expiration, there hasn’t been any trading that really stands out. The highest volume during Friday’s trading session was at the 370-strike call and the 385-strike call, both far out of the money.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

What’s Coming Up

Earnings season continues to pick up this week. These are some of the major reports coming up: 

• Johnson & Johnson JNJ before market open on Tuesday, Apr. 17
• IBM IBM reports after market close on Tuesday, Apr. 17
• General Electric Company GE and Procter & Gamble (PG) both report before the open on Friday, Apr. 20

Next week brings reports from some of the largest companies in the tech sector: Alphabet Inc. GOOG GOOGL, Amazon.com, Inc. AMZN, Microsoft Corporation MSFT, Intel Corporation INTC, Facebook, Inc. FB and Twitter Inc. TWTR are just some of the companies slated to report. The week after, Apple Inc. AAPL reports after market close on Tuesday, May 1.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.