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Netflix Beats, Guides Lower: ETFs in Focus

Sweta Killa

Netflix NFLX, the world's largest video streaming company, reported first-quarter 2019 results after the closing bell on Tuesday wherein it topped earnings and revenue estimates. While the company’s stronger-than-expected subscriber growth cheered investors, its bleak guidance spread pessimism.

As such, Netflix shares fell as much as 9.3% in early after-market hours before paring most of the losses. The stock was down nearly 1% at the close of the after-market trading.

Netflix Q1 Earnings in Detail

The company reported earnings per share of 76 cents, breezing past the Zacks Consensus Estimate by 19 cents and improving from the year-ago earnings of 64 cents. Revenues climbed 22.2% year over year to $4.52 billion, above the Zacks Consensus Estimate of $4.49 billion.

Netflix added 9.6 million new subscribers globally in the first quarter, up 16% from the year-ago quarter and marks the highest quarterly paid net additions in the company’s history. International accounted for the bulk addition of 7.86 million users, while U.S. additions were 1.74 million. Notably, the video streaming giant had 148.86 million subscribers globally at the end of the first quarter (see: all the Technology ETFs here).

The impressive growth was attributable to some of its new hit shows and movies. Umbrella Academy scored 45 million views in its first four weeks on the site; Triple Frontier, starring Ben Affleck, had 52 million views in its first four weeks; and The Highwaymen, starring Kevin Costner and Woody Harrelson, was watched by 40 million in its first month. The documentary feature FYRE: The Greatest Party That Never Happened has been watched by over 20 million member households in its first month on Netflix. Netflix also said that some of its international programming, including Kingdom, are among the first large-scale series in South Korea.

Netflix hinted at a deceleration in the pace of new subscriber addition for the fiscal second quarter, which has historically been a seasonally weaker quarter in terms of wooing new paid memberships. It expects to add 5 million subscribers, down 8% from the year-ago quarter, including 0.3 million in the United States and 4.7 million internationally. Most analysts predict that the price hike in U.S. subscriptions made in January will soften new subscriber growth in the second quarter.

Revenues and earnings per share are expected to be $4.93 billion and 55 cents, respectively, for the second quarter. Revenue expectations are on par with the Zacks Consensus Estimate while earnings per share projection is below the Zacks Consensus Estimate of 90 cents (read: Forget Earnings Recession: Tap Revenue Growth With These ETFs).

In 2019, the online video streaming giant has a solid pipeline of global content including new seasons of some of the biggest series — SStranger Things, 13 Reasons Why, Orange is the New Black, The Crown and La Casa de Papel (aka Money Heist) — as well as big films like Michael Bay’s Six Underground and Martin Scorsese’s The Irishman.  

Though the stock has a disappointing VGM Score of F along with an inflated P/E ratio of 87.72 compared with the industry average of 14.40, it belongs to a top-ranked Zacks industry (top 18%), suggesting room for potential upside. Zacks Rank #3 (Hold) Netflix is primed for growth in the months ahead as it has created an unparalleled lead in the Internet TV business that will likely dominate over the long term.

ETFs to Watch

The beaten down price could be a solid entry point for investors given its dominance in streaming service. As such, we have highlighted five ETFs with a higher allocation to this Internet television network leader that will be in focus in the coming days.

AdvisorShares New Tech and Media ETF FNG

This is an actively managed ETF designed to invest in companies that are driving economic growth in the modern era, and can adapt to changing leadership by maintaining the ability to invest in the next generation of technology and media companies leading the equity markets. It seeks to provide a similar return stream to the performance of technology and media equity leaders as characterized by the FANG acronym. This approach results in a basket of 18 stocks wherein Netflix takes the second spot with 13.6% allocation. FNG has accumulated $20.6 million in its asset base. It trades in average daily volume of 14,000 shares and comes with a high expense ratio of 0.86%.

Invesco NASDAQ Internet ETF PNQI

This fund offers exposure to the largest and most-liquid companies that are engaged in Internet-related businesses by tracking the Nasdaq Internet Index. It holds about 85 stocks with Netflix taking the fifth spot in its basket with 7.4% allocation. Internet & direct marketing retail services dominates the portfolio with 38.3% share in the basket, closely followed by Interactive media & services at 32.5%. The product has AUM of $582.4 million and trades in a lower volume of about 35,000 shares a day. It charges 60 bps in fees per year and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Top-Performing ETFs Of The 10-Year Bull-Run).

First Trust Dow Jones Internet Index FDN

This is one of the most popular and liquid ETFs in the broad tech space with AUM of $8.9 billion and average daily volume of around 796,000 shares. The fund tracks the Dow Jones Internet Composite Index and charges 53 bps in fees per year. Holding 42 stocks in its basket, Netflix occupies the third position at 5.7%. The product has a Zacks ETF Rank #2 (Buy) with a High risk outlook.

iShares Evolved U.S. Media and Entertainment ETF IEME

This newly actively managed ETF employs data science techniques to identify companies with exposure to the media and entertainment sector. Holding 85 stocks in its basket, Netflix occupies the fourth position in the basket with 5.04% share. The fund has accumulated $5.5 million in its asset base and charges 18 bps in annual fees. It trades in paltry volume of around 1,000 shares.

First Trust Cloud Computing ETF SKYY

This fund provides exposure to cloud-computing securities by tracking the ISE Cloud Computing Index. Holding about 28 stocks in the basket, Netflix takes the third spot at 5.34% of assets. The product has been able to manage $2.2 billion in its asset base while sees a good volume of about 318,000 shares a day. It has 0.60% in expense ratio and a Zacks ETF Rank #3 with a Medium risk outlook (read: Tech ETFs Soaring to All-Time Highs).

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