Why Is Netflix (NFLX) Down 8.2% Since the Last Earnings Report?
Zacks Equity Research
Updated
It has been about a month since the last earnings report for Netflix, Inc. NFLX. Shares have lost about 8.2% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Netflix reported second-quarter 2017 earnings of $0.15 per share, which missed the Zacks Consensus Estimate of $0.16. However, revenues of $2.786 billion crushed the consensus estimate of $2.761 billion.
Nonetheless, earnings grew 66.7% while revenues increased 32.3% on a year-over-year basis. Moreover, the company added over 5.2 million subscribers, much more than the expected 3.2 million.
Netflix’s focus on international expansion and original regional content has paid off, with 4.14 million net new additions overseas in the quarter. The company remains confident of adding more and more subscribers as the trend of binge viewing catches up fast. Netflix now has 104 million subscribers globally.
In the company’s letter to shareholders, CEO, Reed Hastings said that the increase in subscribers was “due to our amazing content.” The second quarter had a strong programming slate, with popular shows like House of Cards and Orange is the New Black returning for new seasons. Its new original series, Glow – about female wrestling – also garnered mostly positive reviews.
Segment Revenues
International Streaming revenues (41.8% of total revenue) soared 53.7% year over year to $1.165 billion driven by an increase in paid members.
Meanwhile, Domestic Streaming revenues (54% of total revenue) improved 24.6% from the year-ago quarter to about $1.505 billion.
However, the DVD business continues to be in trouble, with revenues (4.2% of total revenue) declining 17.3% year over year to $114.7 million.
Subscriber Base
At the end of the quarter, Netflix's paid streaming members across the globe were approximately 99.04 million, up from 79.90 million in the prior-year quarter.
In the Domestic Streaming segment, Netflix’s subscriber base totaled 51.92 million, up from 47.13 million in the year-ago quarter. Paid members increased to 50.32 million from 46 million in the same period.
In the International Streaming segment, the company recorded 52.03 million members compared with 36.05 million in the prior-year quarter. Paid members were approximately 48.71 million, up from 33.89 million in the year-ago quarter.
Margins
Consolidated contribution profit margin (revenues minus the cost of revenues and marketing cost) was 21.9% compared with 19.8% in the year-ago quarter.
Consolidated operating income grew 81.6% year over year to $127.8 million. Consolidated operating margin increased 130 basis points (bps) to 4.6%.
Balance Sheet
Netflix had $2.165 billion in cash and cash equivalents (and short-term investments) as of Jun 30, 2017, compared with $1.734 billion as of Dec 31, 2016.
Cash used in operations in the quarter was $534.5 million compared with $226.3 million used in operations in the prior-year quarter. The company reported free cash outflow of $608.4 million.
Outlook
For the third quarter of 2017, management forecasts earnings of $0.32 per share.
Domestic and international streaming revenues are expected to be $1.553 billion and $1.306 billion, respectively. Total streaming revenues are expected to be $2.859 billion while total revenue, including DVD business, is anticipated to be $2.969 billion.
Management expects to add 0.75 million subscribers in the domestic streaming segment and 3.65 million subscribers in the international segment. Domestic streaming contribution profit is likely to be $576 million while International streaming segment is anticipated to earn $30 million. Netflix estimates the U.S. contribution margin to be around 37.1% in the quarter.
The company forecasts total operating income of $204 million for the quarter.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed an upward trend in fresh estimates. There have been 14 revisions higher for the current quarter. In the past month, the consensus estimate has shifted upward by 46% due to these changes.
Netflix, Inc. Price and Consensus
Netflix, Inc. Price and Consensus | Netflix, Inc. Quote
VGM Scores
At this time, the stock has a poor Growth Score of F, however its Momentum is doing a lot better with an A. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for momentum based on our styles scores.
Outlook
Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.
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