Equities trading - Netflix (NFLX)

Netflix is due to report fourth quarter earnings after the closing bell on Monday, January 22nd.

After a market-beating rally over the last year and a price-to-earnings ratio that is eye-wateringly high, what’s in store this time?

Zacks estimates place earnings per share (EPS) at 41 cents on revenues of $3.259 billion, which would amount to a year-over-year increase of 173% and 31.5% respectively.

Subscription numbers are key. After it raised prices in October, investors will want to know whether this has any knock-on effect on subscription growth. Subscriber growth in Q3 was very strong, with Netflix adding 5.3m new customers in the quarter, exceeding guidance of 4.4m. Most of these came from outside the core US market and it’s the international growth potential that truly supports bulls’ investment thesis on the stock. The company has guided net adds in Q4 of 6.3m, with this again coming predominantly from the less mature international segment.

The other important thing to watch is the cash burn, which remains high. But however high it gets, investors remain comfortable. We note that in a second quarter letter to investors management said it expects to remain free cash flow negative for years to come. CFO David Wells added that the more Netflix grows, the more cash it will spend on original content.

This is important. Content is king and the more it invests in this area the more it attract new subscribers. Macquarie and UBS are bullish for this very reason, noting that it is this investment that keeps it ahead of competitors.

It will be interesting to see how the move by Disney to launch a rival streaming service is seen by management. There are questions over whether this constitutes a smart play by Disney, but it nevertheless constitutes a viable competitor to Netflix in the space.

Share price metrics

Shares have risen c20% since late December to achieve a record high above $222. The stock trades on a price-to-earnings multiple of about 220 – sky-high optimism is baked in. Q4 performance may therefore matter less than the outlook.

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