Netflix, Inc. (NFLX) Earnings Preview

Netflix, Inc. (NFLX) Earnings Preview
NFLX Photo by Matt Perreault

RBC Capital Markets analysts Mark S. Mahaney, Andre Sequin, Brian Peak and Kevin Potterton rate Netflix, Inc. (NASDAQ:NFLX) as Outperform as the video streaming giant gears up to announce its financial results for the fourth quarter on Wednesday, January 22nd.

Netflix earnings expectations

Analysts at RBC are looking for $1.16B in revenue and $0.64 in GAAP EPS. Our revenue and GAAP EPS estimates are essentially inline with consensus at $1.17B and $0.65, respectively. Note that our and Street estimates are also generally consistent with Netflix, Inc. (NASDAQ:NFLX) guidance – and our GAAP EPS estimate is in the upper half of guidance. We would also expect Q1 guidance to bracket consensus, but like previous quarters – the extent of the new international market launches could be an EPS wildcard.

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Netflix intra-quarter data points

1) Mixed to positive comScore US Web traffic trends – Q4 US desktop unique visitors grew 6% Y/Y, flat vs. 6% Y/Y growth seen in Q3, on a 3pt easier comp. Total US pages viewed grew 22% Y/Y in Q4, vs. 9% Y/Y growth in Q3, on a 3pt tougher comp. 2) Proprietary US Netflix Survey – As part of our December 12, 2013 Netflix UTLT report, we e-ran our proprietary US Internet user survey in order to analyze Netflix’s current consumer value proposition.

Key factors to focus on

In addition to the Q4 revenue and EPS results – as well as the Q1 guide – we believe the following are key factors to focus on: 1) Subscription metrics and trends – We are estimating 2.05MM net new US streaming subs, a loss of 300,000 DVD subs, and 1.4MM net new international streaming subs. 2) Domestic streaming contribution margins – We are looking for a 23.0% segment contribution margin (70bps sequential contraction, though a 450bps Y/Y expansion), which implies 55% Y/Y growth in Netflix, Inc. (NASDAQ:NFLX)’s Q4 domestic streaming contribution profit. 3) International (lack of) profitability – We anticipate international contribution losses of $62MM, down modestly from a $74MM loss in Q3, and down from peak segment contribution loss of $105MM in Q4/12 – as the segment scales over the long term.

Netflix valuation

Our price target of $440 is based on a sum-of-the-parts methodology on our 2015 estimates. We use a 35x P/E multiple on our domestic streaming non-GAAP EPS, an 8x multiple on our domestic DVD non-GAAP EPS, and a 5x P/S multiple on our international streaming revenue. We believe that these multiples are commensurate with the segments’ relative growth rates. Despite the significant appreciation of Netflix, Inc. (NASDAQ:NFLX) shares in 2013, we can still point to four potential future catalysts: 1) evidence of pricing power/ARPU expansion; 2) cable distribution deals; 3) international market(s) profitability; and 4) more successful original offerings. Netflix remains on track to become an Internet video utility…

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