Netflix (NASDAQ:NFLX) reported a fairly solid quarter despite some negative commentary pertaining to competition. Walt-Disney officially announced their Disney+ service, and also Apple announced Apple TV+ in the past couple weeks leading up to Netflix’s quarterly result. The CEO of Netflix, Reed Hastings on the quarterly earnings call seemed unfazed by the entrance of both Apple and Walt-Disney in the streaming segment, as he mentioned that there has always been a lot of competition, and that it probably wouldn’t impact Netflix’s growth rate by much.
The quarterly results seemed relatively solid, as the company reported revenue of $4.521 billion, and dil. EPS of $0.76 for Q1’19 results. This compared to analyst expectations of $4.5 billion revenue, and dil. EPS of $0.57 for the quarter. Netflix beat expectations on both metrics, representing a $210 million revenue beat, and a $0.19 dil. EPS beat as well.
However, the financial outlook for Q2’19 was $4.928 billion revenue and Dil. EPS of $0.55. versus expectations of $4.95 billion revenue and Dil. EPS of $0.99. Netflix will likely report revenue that’s in-line with expectations next quarter, but expectations for profits next quarter fell short by $0.44 this was largely owed to a 48% tax rate, which will be a one-time discrete event with the corporate tax rate higher than usual for just Q2’19.
UBS Analyst, Eric Sheridan remained optimistic on the long-term narrative around Netflix in a report released right after Netflix announced earnings. Eric Sheridan reiterated his Buy rating and $420 price target, which implies nearly 18% upside from current levels.
"We would focus investor attention on NFLX’s key attributes: a) pricing power in developed markets; b) potential for pricing tiers in developing economies to open up greater scale; c) compound revenues at a 20%+ CAGR; d) expand operating income margins; e) lessen its dependence on capital market fundraising; & f) has low/no regulatory headwinds. As a result, over the long-term, we see NFLX as a top pick as it capitalizes on the opportunity to be the global leader in streaming media & the competitive moat around its business widens (via a mix of content spend, marketing, & scale)," Sheridan noted.
On the investor call following the report, management still remained certain that the margin narrative would improve by the second half of 2019 due to the pricing increases that will take into effect starting from May. Also within the shareholder letter, “While there will be some quarter-to-quarter lumpiness in operating margins due to the timing of spending, our full year 2019 operating margin target of 13% is unchanged, which means that we expect operating margin in the second half of the year will be higher than the first half.”
Netflix shares have been trading sideways for the past year, but the bias still remains to the upside. The subscriber growth figures for Q2’19 outlook was 5M additional subscriber versus Q1’19 additions of 9.6M. So there’s a bit of a subscriber growth drop-off, but that might be explained by the anticipated churn rate in subscribers according to Netflix’s shareholder letter, “We’re working our way through a series of price increases in the US, Brazil, Mexico and parts of Europe. The response in the US so far is as we expected and is tracking similarly to what we saw in Canada following our Q4’18 increase, where our gross additions are unaffected, and we see some modest short-term churn effect as members consent to the price change.”
Overall, investors can walk away from the quarter with the expectation that results will be back-half loaded with Q2’19 providing somewhat of a bridge until thing’s get more exciting in terms of profitability and revenue growth tied to price increases. Subscriber growth will likely normalize given enough quarters keeping the long-term growth narrative relatively appealing.
Wall Street likes the risk/reward factor at play here, as TipRanks showcases a Buy consensus rooting for Netflix's success. Out of 32 analysts polled in the last 3 months, 25 are bullish on NFLX stock, 5 are playing it safe on the sidelines and 2 are bearish. With a return potential of nearly 15%, the stock's consensus target price stands at $409.07. (See NFLX's price targets and analyst ratings on TipRanks)