Netflix Reports Earnings Monday: Business Model Still Looks Strong

Netflix (NFLX) is scheduled to report fourth quarter 2008 results after the market closes on Monday, January 26. Based on our analysis, we at EarningsPreview.com are expecting NFLX to report better than expected results that beat Wall Street's expectations.

Analyst Expectations

We are forecasting revenues of $355.1 million and EPS of $.36. This would represent a 17% increase in revenues from last year's $302.4 million in the same period. The current analyst consensus calls for revenues of $353.9 million and $.34 EPS. On October 20, the company gave fourth quarter guidance for revenues of $351 – 357 million and EPS of $.30 - .38.

On December 11, Netflix's CFO announced that the company would exceed the high end of subscriber guidance in the fourth quarter. This was after the company reduced subscriber guidance on the last earnings call. So while the market fears of August through October of last year caused subscribers to pass on the service, they appear to be coming back in force.

We have continued to recommend Netflix as a business model that could thrive as a "trade down" play in a recessionary environment. The company offers a low-cost alternative to budget-conscious consumers even in tough economic times. The falling prices of blu-ray players over the holiday season could also provide some top-line lift to revenues this year. Last year, the company began charging an additional $1 for blu-ray subscribers. We believe that these subscribers could increase dramatically in 2009 and would not rule out further price increases in the blu-ray segment.

Finally, while the deteriorating advertising environment is hurting some companies, Netflix stands to gain from the weak environment. Lower CPMs and display pricing will allow it to reduce marketing spend while enhancing margins in poor economic environment.

Share Performance

Netflix's shares are up over 70% since falling below $18 per share last October. In 2008, Netflix was one of the stock market's best performers, gaining over 12% while the Dow Jones index's slide was 34%. Valuation Shares are now trading at 20x consensus 2009 EPS estimates. This is a premium to the relative valuations of their peer group. This is certainly a stock that deserves a premium valuation and could end up outperforming Wall Street's estimates once again in 2009. While the stock price is probably too high to buy now, any pullback in the coming months could be a good buying opportunity

Recommendation: Buy with a $30 price target.

Disclosure: None.

Comments

[Dellmsft:]

$30 price target? Last sale 30.84.

Jan 23 09:12 AM

[reyito:]

damn dellmsft, you beat me to it....

nice price target guys. don't go too far out on a limb

Jan 23 10:39 AM

[svosavvy:]

Long nflx, but, these guys are gonna have to knock one out of the park to stay at this valuation.

Jan 23 10:45 AM

[Madacasto:]

I'm feeling the rumbling of a media-tsunami when somebody figures out how to streamline the distribution of media to tv's/displays without traditional coax distributors (ie. time-warner). Very fragmented now. I'd like to see Netflix gain the edge in this arena and lock down agreements with the major studios and television networks. Netflix has made gains, but is not quite there. The mail-order business sure beats the pants off of video stores though, in the mean-time.

Jan 26 10:33 AM