Netflix (NASDAQ:NFLX) is not for the faint of heart. At 100x next year's earnings, any miss on investor expectations would result in a sharp sell-off of the stock. The company's latest Q1 can be characterized by the following: a beat on domestic and international subs, a miss on the guidance and increased competitive threat from rivals that once trailed the OTT provider by a wide margin. More concerning, the company has yet to see a normalized growth pattern despite the favorable macro tailwind of OTT migration and cord-cutting. Although the ambitious international expansion strategy is designed to counter the weakness in the domestic market, it appears that the accelerated competitive risk from Amazon (NASDAQ:AMZN) and other OTT providers may not give NFLX enough time to offset this risk through expanding its international platform. To be clear, I am bullish on the overall macro trend that favors OTT providers and content producers but I am skeptical on whether NFLX remains the best stock to play this trend. That said, I remain bearish on the stock and recommend investors to stick with the content providers, namely Time Warner (NYSE:TWX), Disney (NYSE:DIS) and Lions Gate (NYSE:LGF). (see - Netflix: 2016 Outlook - Slight Chance Of Shower)
Q1 EPS of $0.06 was ahead of consensus $0.04 while revenue of $1.96 billion was largely in line with consensus $1.97 billion. Domestic net adds of 2.23 million handily beat forecasted 1.75 million and consensus 1.82 million, as well as international streaming net adds of 4.51 million (vs. consensus 4.49 million and forecasted 4.35 million). On the first look, this would have been a great quarter except that guidance of $0.02 EPS for Q2 was sharply lower than the $0.05 consensus due to the weaker than expected domestic streaming net adds of +500 thousand (vs. consensus +505 thousand) and international streaming net adds of +2 million (vs. consensus +3.45 million).
I see several risks for NFLX's growth outlook this year. First, domestic subs growth will likely remain challenged by the growing competition from alternative OTT providers such as Hulu, AMZN, GOOG (Google 2016 Outlook: The Changing Face Of TV ) and HBO that have been driving the decelerating domestic subs growth over the past several quarters. The recent decision by AMZN to introduce a stand-alone OTT service magnifies the risk profile that NFLX faces. Although AMZN's content library is still smaller relative to that of NFLX with smaller geographic footprint, AMZN's execution on several original content is a good indication of future success in my view and this poses a threat to NFLX in the long term. (Amazon 2016 Outlook: Ready For Prime Time)
Second, content inflation will remain elevated as SVOD and studios contend for the top talent and stories. Worth reminding investors that "The Crown" will cost $143 million for the first two seasons and this is 43% more than the first two seasons for "House of Cards." Higher spending on original content will continue to weigh in on NFLX's profitability, in my view.
Conclusion: I remain bearish on NFLX and recommend investors to stick with the content owners. NFLX in the OTT world is no different from the current cable companies that are essentially "dumb pipes."
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.