Netflix (NFLX) continues to pull ahead into earnings with a number of positive analyst reports to drive the stock heading into earnings today. The stock continues to hover in the $350 to $365 range this month after exhibiting a strong recovery rally following the market pullback in Q4 of 2018. The stock could break its 1-month range, but it’s heavily dependent on whether or not earnings results surprise.
The biggest catalyst to the stock near-term is today's earnings where management will disclose both financial outlook, and also the company’s subscriber figures. Profitability is anticipated to improve over the next two-years, as they scale their revenue base and slow spending growth. However, Netflix will plow revenue back into content spending/investments and ongoing expansion into foreign market where there’s a high level of broadband penetration.
Content is going to be key over the next 12-months with a number of content licenses anticipated to expire. Wedbush analyst Michael Pachter remains more bearish on the content narrative than other investment banks:
Over the next 12 months, we expect a large quantity of existing Netflix content to migrate away from the service. Disney and Fox will launch Disney Plus later this year, and presumably, content from each studio will find an exclusive home on the new network. Warner Bros. also plans a proprietary service later this year, and Comcast’s NBC Universal unit will launch a proprietary service in 2020. We estimate that these four studios provide around 20% of Netflix’s overall content measured by available hours and closer to 40% of hours viewed on the service. By the end of 2020, we expect all of this programming to disappear from Netflix, and we think that the company will find replacing the content with originals a daunting task.
The loss of Disney, Fox, NBC Universal and Warner Bros. could play out negatively for the streaming service when looking out over a two-year timeframe, but that’s only assuming that none of these studios look to negotiate an on-going licensing deal with Netflix. Warner Bros. and Walt-Disney more likely at risk, as Disney is anticipated to launch a streaming service whereas Warner Bros. might consolidate more of their titles by moving onto HBO Now or launch a separate service independent of HBO.
On the other hand, Netflix remains the leader with content spending, as they’re anticipated to spend $15 Billion over the course of 2020, which dwarfs the spending that’s anticipated from the other streaming services alternatives, i.e. Hulu and Amazon. Hulu’s spending on content originals matches Amazon. Hulu also has a number of TV shows they license from established TV networks that also gets subsidized with advertising revenue as well. Whereas Amazon is a little more diversified with its Prime Subscription, as it’s not a stand-alone streaming service.
The $1 price increase for the base plan, and $2 increase for standard and premium Netflix plans will drive the revenue narrative over the next 12-month. This may offset some of the concerns tied to the loss of content licenses (because they’re bound to make more money when they charge higher prices) thus providing Netflix with more resources to film more content originals (which has continued to trend upwards in the past couple years).
Pricing increases probably won’t affect Netflix’s subscriber growth by much in the upcoming quarter or over the next 12-months.
Source: Piper Jaffray
Piper Jaffray's Michael Olson anticipates some subscriber upside tied to their Search Index weighting methodology. It suggests that Netflix’s subscriber growth could beat expectations or outlook in the impending quarter. What would drive expectations higher and cause the stock price to rally is a surprise on subscriber growth, and the current data points suggest that Netflix could surprise on domestic subscriber growth by 4 percentage points (most optimistic scenario) and could surprise by 13 percentage points in international subscriber growth.
Keep in mind, this laps into a period where Netflix will also experience the benefit of a price increase starting from the month of May onwards, which will also boost expectations tied to revenue growth. Piper Jaffray estimates that Netflix will finish the year with 177M paying subscribers for both domestic and international streaming, and if that base of subscriber is also paying a heightened subscription rate, the near-term growth narrative still makes sense, especially because the subscriber plus pricing growth narrative seems to work near-term for investors.