Netflix share price: what to expect from Q1 earnings

After a weaker set of figures in the last quarter, Netflix’s earnings are expected to improve, helped by a rise in subscription prices and continued production successes.

Netflix Source: Bloomberg

When is Netflix’s earnings date?

Netflix reports earnings on 16 April, after the market close, covering its fiscal first quarter results.

Netflix’s results preview: what does Wall Street expect?

Netflix is expected to report earnings of 76.3 cents per share, down 0.1% on a year earlier, while revenue is expected to rise 22% to $4.51 billion. It has beaten forecasts on these metrics in five of the last eight earnings reports, and after seeing a drop in earnings from quarter three (Q3) 2018 to Q4 2018 the slight year-on-year (YoY) decline is not particularly concerning, representing an increase over the Q4 2018 performance.

In Q4, revenue grew by 27%, thanks to an increase of a third in paid memberships, along with a rise in the subscription price of 3%. In constant currency, the figure was even stronger with a 6% rise in the price of a subscription. With further increases in the US subscription price to come, the revenue picture looks strong for the foreseeable future.

The impact of the ‘content wars’, the ongoing battle between key networks to maintain market share with new and exciting titles, is being felt at Netflix. Operating margins fell to 5.2% for the previous quarter, from 7.5% at the end of 2017 as costs rose, and this is expected to improve, with management expecting operating margins to surge to 8.9% as the release calendar thins out to an extent.

In the longer term, the operating margin is expected to widen further, to 13% for 2019 as a whole, an improvement of almost a third on the 10% 2018 operating margin. It is this ability to generate cash that makes Netflix such a compelling investment.

Investors in Netflix are used to price-to-earnings (P/E) ratios that are somewhat higher than for the ‘average’ stock. Currently the stock trades at 70.5 times forward earnings, but this is below the five-year average of 106. When the valuation fell to 55 at the end of 2018 it fell into what might be viewed for Netflix as ‘bargain territory’, one standard deviation below the longer-term valuation of 106. This was the cheapest valuation for Netflix since the beginning of 2015, and the opportunity to buy the stock was quickly seized by investors.

The major question for Netflix is how much it will have to keep spending on content to maintain market share. Such successes as ‘Bird Box’ garner plenty of attention, but for each big winner there will be hosts of other productions that are less successful but require funding nonetheless. Netflix faces major competitors such as HBO and Disney, and with streaming services now the norm in the US it will require ever-larger funding to maintain the firm’s position.

How to trade Netflix’s Q1 results

The average move on results day for Netflix’s stock is 6.4%, but current options pricing suggests a more volatile day, with a move of 7.5% expected. Volatility in Netflix’s stock has been steadily declining since November, when the 14-day average true range hit a peak of $21.60, or 5.5% of the then stock price.

Since then, the 14-day ATR has declined to $9.22, or 2.5% of the stock price, as the stock settles into a narrow range.

Investors trading Netflix should note that April is one of the weaker months on average for Netflix, with an average return for the month of 1.7%, with the month being positive 56% of the time over the past 16 years. This follows on from a very strong Q1 on average, when the stock gains an average of 19.7% in January, 4.6% in February and 4.4% in March. May, however, tends to see gains of 7.2% on average, with a positive return 63% of the time.

Netflix stock price: technical analysis

The year 2018 was a mixed year for Netflix. Seemingly-unaffected by the general rout in equity markets in the first months of the year, the stock hit a record high at $423 in June 2018. Following on from this, it began a steady retreat in July, but even then the low of 2018 in December, $231, was only the lowest since January, unlike many other equities.

The stock rallied from the December lows, hitting a five-month high in March. It has dropped back from this high but remains within the uptrend from the lows of December, although a bearish wedge may have developed that could see the price drop back towards $340 in the first instance. However, for now the long-term uptrend is still intact even considering the late 2018 sell-off.

Netflix technical analysis

Netflix technical analysis

Solid future for Netflix

Netflix continues to confound the doubters, enjoying strong growth in both its home market in the US and overseas. Its high spending on content has hit margins, but these are expected to recover, and crucially Netflix is expected to be able to keep raising subscription prices despite the increasingly-competitive environment. Technically, the stock price has recovered from its 2018 lows, and is still in an uptrend, but even so the valuation remains below the five-year average. Q1 earnings should provide further evidence of Netflix’s strong performance.


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