Netflix producing the goods

Netflix will announce its second-quarter figures on 15 July, with its share price cooling since printing another record high at the end of June. 

Netflix app on a mobile phone
Source: Bloomberg

Netflix’s rapid expansion is still underway with the company focussing its sights on the international market and on increasing the amount of in-house content.

The latest quarterly update from the company showed that its client base topped 62 million, and the number of international customers outstripped that of those in the US, with both client numbers exceeding analysts' estimates. Nearly 40% of TV owners in the US are subscribers to Netflix, and the firm has recently rolled out its service to Australia and New Zealand, with Japan also on the agenda this year. The firm hopes to be a worldwide service by the end of next year, but inroads to China will be difficult.

The company has successfully made the transition from solely being a platform for imported content to a successful producer of content, and smash hits like House of Cards and Orange Is the New Black are prime examples. The budget for original programming has been ramped up, and homegrown hits reap higher rewards than costly buy-ins. A long-standing complaint of film and TV is that there aren’t enough female leads or female-dominated shows. Netflix’s willingness to produce series like Orange Is the New Black proves that it is willing to go beyond industry norms, and this could help its customer base increase. Netflix, like Frank Underwood, has high hopes, and the rally in the stock price indicates investors are optimistic.

However not everyone holds a rosy outlook, legendary investor Carl Icahn revealed he closed out his long position in Netflix last week, when the company’s share price hit another record high. The billionaire investor averaged his way into the stock at $58 three years ago, and is rumoured to have taken $960 million off the table when he cashed in his holdings. Mr Icahn also stated he feels Apple is undervalued, and he feels the iPhone manufacturer offers similar potential as Netflix did ‘several years ago’.

Last month, Netflix announced a seven-for-one stock split that will take effect on 15 July, and any clients holding a position after 1am on 15 July will be impacted by the stock split.

When Netflix reveals its second-quarter figures, the market is expecting revenue of $1.64 billion and EPS of 55 cents. The first-quarter numbers missed analysts' estimates with revenue of $1.57 billion and EPS of 66 cents, against market expectations of $1.57 billion and 96 cents respectively. The firm will report its full-year numbers in January 2016, and the market is expecting revenue of $6.7 billion and EPS of $2.3. These forecasts represent a 22% jump in revenue and a 58% fall in EPS from the previous year's figures.

Equity analysts are bullish on Netflix, and out of the 44 recommendations, 22 are buys, 16 are holds, and six are sells. The average target price is $634, which is 3.3% below the current price.

The number of short positions on the stock has decreased by 13% since the company reported its second-quarter numbers.

Netflix’s share price has undergone rapid growth since 2013, and the $700 level is the initial target. Any moves lower will find support in the $640 region.

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