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Q1 2016 Netflix NFLX Earnings Analysis

Netflix $NFLX is set to report their Q1 2016 earnings on Monday 4/18

The market expects Netflix to report EPS of $0.03 and revenue of $1.96B compared to EPS of $0.38 and revenue of $1.40B during Q1 last year. Netflix own guidance is set to EPS of $0.03 and revenue of $1.813B. However, if we look at the numbers from previous quarters it looks like an EPS of $0.03 is definitely at the low end.

Netflix Quarterly Earnings History

Fiscal
Quarter End
Earnings
Per Share
EPS Forecast %
Surprise
Dec2015 0.07 0.02 250
Sep2015 0.07 0.07 Met
Jun2015 0.06 0.05 20
Mar2015 0.11 0.1 10

Subscriber Growth

Every investor in Netflix is eyeing the same number, subscriber growth. During its last earnings call, Netflix said that it expects to add 1.75M new customers in the US, and another 4.35M in international markets. That compares with 1.9M and 2.43M net customer additions in the domestic and international markets, respectively, that Netflix posted during Q1 2015.

As Netflix has now covered more than half the U.S. market and the law of large numbers are settling in and the percentage growth in subscribers is bound to slow down.

 

Let take a look at the google trend:

Netflix q1 2016 trend analysis

 

The search volume for Q1 this year is 25% higher than it was last year. However, for Q4 that number was 28%, which in turn generated a net additional  6.10 million subscribers which oddly enough is the same as the estimated number of net adds for this quarter. So if we compare Q4 2015 and Q1 2016 search volume the average was 8% higher for this quarter, which would set us at about 6.6 million new subscribers on the high end and comparing Q1 2015 vs Q1 2016 we would see a 25% increase which results in 6.10 million net adds on the low end.

So the search numbers are bullish, and that’s understandable….

Netflix international expansion 2016

Netflix’s international subscriber growth has been impressive over the past few years and is expected to remain hot in the coming quarters. As late as January of this year they entered all of Africa, eastern Europe, and all of Asia except for China.

Content and Expansion is Expensive

Investors are also interested to see if Netflix can start increasing their margins. Netflix’s earnings have come under a lot of pressure as the company continues to expand into international markets, and also due to the company’s growing content costs. Since Netflix is now in almost every market it will be concentrating more on diversifying its content in these markets to meet local needs. This should ease some pressure on the bottom line. Netflix has had to increasingly bid for content from its traditional cable TV providers against Amazon $AMZN and Hulu which enjoys the backing of some of the largest cable TV companies. This is not something that it likely to change soon.

Netflix said on its last earnings call that it will start generating some substantial positive cash flow in late 2017. This would be something which investors will be looking closely at.

The Technical Take:

Netflix stock is down 6.5% YTD, though it’s been rallying strongly since February and is now 30% above its February lows.
netflix Q1 2016 technical analysisThe stock has just broken out of the 100 and 200 day range, which means that if we see a beat we can see this sail up to $120 and then continue back to it’s year-high of $130. However, a miss would send it back to the 30-50 day range between $100 – $96.

So from the technical we see that the risk-reward is gains of $9 – $19 on the upside and losses of ($11 – $15) on the downside.

 

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