Netflix, Inc. Stock Tumbles Amid Q4 2017 Earnings Previews

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Netflix, Inc. (NASDAQ:NFLX) is slated to release its fourth-quarter earnings report next week, and bulls and bears seem to agree that the results will turn out to be strong. However, where they disagree on Netflix stock is the implications of the company’s cash burn, which is funding content acquisition. Consensus estimates for Netflix Q4 2017 earnings stand at 41 cents per share on $3.28 billion in revenue. The company guided for about 41 cents per share in earnings on $3.27 billion in revenue.

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Price target for Netflix stock boosted

In a note to investors on Tuesday night, GBH Insights analyst Daniel Ives said he increased his price target for Netflix stock from 235 to $255 per share and maintained his Highly Attractive rating. He believes the streaming firm beat estimates for subscriber adds during the fourth quarter despite the price increase as international subscriber adds continues to drive growth.

He pegs Netflix’s total subscriber adds at 7 million for the fourth quarter based on his surveys, although he’s currently only estimating 6.3 million, which is in line with management’s guidance. They guided for 1.25 million domestic subscriber adds and 5.05 million international subscriber adds. The company added 5.3 million subscribers in the third quarter.

Ives noted that the competitive landscape is changing, especially with the combination of Walt Disney and Fox’s entertainment assets. He warned that Disney is a potential threat and set for a battle in 2019. However, he feels that Netflix is in a “unique position of strength” as it grows its content “tentacles” over the next 12 or 18 months.

Netflix to keep growing its content “tentacles”

He’s bullish on Netflix stock because he believes that the firm’s “competitive moat, franchise appeal, ability to increase international streaming customers through 2020, and original content build out will translate into robust profitability and growth” as the next phase of that growth plays out this year.

He continues to believe that content enables Netflix to rule, noting that the company guided for content spend to reach $7 billion to $8 billion this year, an increase of about $1 billion year over year. Company management said on the third-quarter earnings call that they expect about one-quarter of the content spend to be on original content in 2017, but their long-term goal is to reach 50% by 2020.

Ives also said that international growth remains at the center of focus, and he estimates Netflix’s total addressable market at more than 700 million subscribers internationally by 2020. He expects the firm to reach between 90 million and 100 million international subscribers by then.

Bearish view of Netflix Q4 2017 earnings

Wedbush analyst Michael Pachter argues the bearish case for Netflix stock. He maintains his Underperform rating and $93 price target on Netflix stock going into next week’s earnings report. His biggest concern for Netflix stock continues to be the company’s cash burn, and although Ives sees international profitability as imminent, Pachter warned in his own note that it could be elusive because of competition, both for subscribers and content.  Further, he warned that the repeated price increases might cause subscriber growth to decelerate.

Despite all these warnings, his estimates for the Netflix Q4 2017 earnings report are ahead of consensus. He’s looking for $3.313 billion in revenue and earnings of 42 cents per share. He also projects 1.35 million domestic subscriber adds and 5.15 million international subscriber adds. He believes that subscriber churn was limited during the fourth quarter by the release of high-profile content such as the new season of Stranger Things.

What to expect from Netflix’s guidance

As far as the guidance expected with the Netflix Q4 2017 earnings release, he looks for $3.6 billion in revenue, earnings of about 51 cents per share, and 5.5 million subscriber adds, including 1.5 million domestic subscribers and 4 million international subscribers. Pachter said that consensus for the first quarter includes $3.5 billion in revenue, earnings of 55 cents per share, and 1.42 million domestic subscribers and 3.53 million international subscribers.

In the longer term, he warned that Disney could end up becoming a “formidable” foe for Netflix, especially as it pulls most of its newer content at the end of this year. Meanwhile, he said that Comcast, Time Warner and Fox are shifting most of their content toward Hulu, which he expects to result in lower satisfaction for Netflix subscribers.

Netflix stock tumbled in intraday trading on Wednesday, falling by more than 1% to as low as $216.32.

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