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Netflix Tops $100 Billion on Subscriber Surge: ETFs to Buy

Sweta Killa
Higher revenues boost Marsh & McLennan's (MMC) solid first-quarter earnings.

Netflix NFLX, the world's largest video streaming company, cheered investors with blockbuster subscriber growth in its fourth-quarter results after the closing bell on Monday. The company also issued a better-than-expected subscriber growth guidance for the first quarter and topped revenue estimates though it met the earnings expectation.

Based on subscriber boom, Netflix shares surged nearly 10% following the earnings release in after-market trading and reached a new all-time high, topping $100 billion in market capitalization for the first time ever (read: Market at New Highs: Mega Cap ETFs & Stocks On A Roll).

Netflix Q4 Earnings in Detail

The company reported earnings per share of 41 cents, in line with the Zacks Consensus Estimate and up from 15 cents in the year-ago quarter. Revenues climbed 33% year over year to $3.29 billion, well above our estimate of $3.26 billion. Most of the strength came from global streaming revenues, which were up 35.3% year over year.

Netflix added a record 8.33 million new subscribers globally in the fourth quarter, easily crushing the company’s projection of 6.3 million additions and more than the year-ago additions of 7.05 million. International accounted for the bulk addition of 6.36 million users while U.S. additions were 1.98 million. The ongoing global adoption of Internet entertainment is driving the company’s growth. Hit original shows for the quarter include 13 Reasons Why and the new seasons of Stranger Things, Black Mirror and historical drama The Crown while new programs include Godless, Marvel's The Punisher and Mindhunter as well as the release of the big-budget fantasy action movie Bright.

Notably, the video streaming giant reached 117.58 million subscribers globally at the end of 2017 with international subscribers (62.83 million) outpacing the United States (54.75 million). This indicates its continued dominance in the global streaming media market (read: Disney-Fox Deal to Change Media Industry: ETF in Focus).

For first-quarter 2018, the company expects to add 6.35 million subscribers, including 1.45 million in the United States and 4.9 million internationally. Revenues and earnings per share are expected to be $3.69 billion and 63 cents, respectively. Both numbers are well ahead of the current Zacks Consensus Estimate of $3.52 billion for revenues and 57 cents for earnings per share.

Solid 2018 Outlook

The online video streaming giant is deeply focused on growing its global operating margin with a target of 10% for 2018, up about 300 bps year over year. As the company’s big investments in content are paying off with 9% year-over-year growth in average streaming hours per membership in 2017, Netflix now plans to spend $7.5-$8.0 billion this year on content including original shows and movies, to become the world's top movie and TV streaming service. A sizeable spending will go toward producing 30 new anime series and 80 new original films.

In particular, the company is looking to fill half of its streaming catalog with its own original shows and movies by the end of this year. Some of the TV shows and movies include Mute, Season 2 of Making a Murderer, Season 1 of Altered Carbon, Season 2 of Marvel's Jessica Jones, Season 1 of Maniac, Season 2 of GLOW, Sense8: Finale Special, The Ballad of Buster Scruggs (mini-series), Season 6 of House of Cards, Season 5 of Arrested Development, and The Irishman.

Though Netflix belongs to a miserable Zacks Industry Rank in the bottom 23%, and has a disappointing VGM Style Score of F along with an inflated P/E ratio of 95.76 compared with the industry average of 12.20, it currently carries a Zacks Rank #3 (Hold), suggesting room for potential upside. 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 (see: all the Technology ETFs here).

ETFs to Buy

Investors might want to capitalize on this Internet television network leader’s growth and the upcoming surge in its share price with lesser risk in the form of ETFs. For these investors, we have highlighted five ETFs with a higher allocation to Netflix and the potential to be big movers in the coming days.

PowerShares Nasdaq Internet Portfolio 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 84 stocks with Netflix taking the top spot in its basket with 8.6% allocation. Internet software & services dominates the portfolio with 55.6% share in the basket, closely followed by Internet & direct marketing at 37.6%. The product has AUM of $515.3 million and trades in a light volume of about 35,000 shares a day. It charges 60 bps in fees per year and has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Top-Ranked ETFs Crushing the S&P 500 to Start 2018).

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 stocks acronym. This approach results in a basket of 23 stocks wherein Netflix takes the fourth spot with 6.7% allocation. FNG has accumulated $47.1 million in its asset base. It trades in average daily volume of 70,000 shares and comes with a high expense ratio of 0.85%.

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 $5.9 billion and average daily volume of around 365,000 shares. The fund tracks the Dow Jones Internet Composite Index and charges 54 bps in fees per year. Holding 42 stocks in its basket, Netflix occupies the third position at 5.7%. Internet mobile applications account for 44% of the portfolio while Internet & direct marketing makes up for 20%. The product has a Zacks ETF Rank #2 with a High risk outlook (read: 5 Tech ETFs That Crushed FANG ETFs in 2017).

PowerShares Dynamic Media Portfolio PBS

This fund provides exposure to media stocks under one roof by tracking the Dynamic Media Intellidex Index. It seeks to offer capital appreciation by investing in companies that are selected on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action and value. Holding about 29 stocks in the basket, Netflix takes the third spot at 5.3% of assets. Within the media sector, the product is well spread out across Internet & mobile applications, movies & entertainments, publishing, Internet & direct marketing, cable & satellite and television & radio that account for double-digit exposure each. The product has been able to manage $53.8 million in its asset base while sees lower volume of about 33,000 shares a day. It has 0.63% in expense ratio and a Zacks ETF Rank #3 with a Medium risk outlook.

First Trust Cloud Computing ETF SKYY

This fund provides exposure to cloud computing securities by tracking the ISE Cloud Computing Index. Holding about 30 stocks in the basket, Netflix takes the second spot with 5% of assets. Software firms dominate this ETF accounting for 40% share while Internet software services (15.1%) and communication equipment (14.3%) round off the next two sectors. The product has amassed $1.4 billion in its asset base and sees a good volume of about 147,000 shares a day. It has 0.60% in expense ratio and a Zacks ETF Rank #2 with a Medium risk outlook.

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