Estimates for the S&P this earnings season are pointing to roughly 7% decline year-over-year. This "earnings recession" has hit topline revenue growth, but a strong headwind cited by many managers over the last few quarters, the strong dollar, should be subsiding. The dollar's first quarter has shown signs that the currency is slowing down its hot growth, which can be a good thing for international companies like Netflix (NASDAQ:NFLX).
In two weeks, Netflix announces its earnings for the most recent quarter. On the last earnings call, management at Netflix (which is now available in 130 countries globally) pointed a finger at the foreign exchange problem when looking at operating losses abroad. CFO David Wells explained:
I mean we continue to have an environment where we're running deep into some pretty headwinds of foreign exchange, if that continues that might challenge that 120 million upward a little again 10-20 million
Indeed, in the most recent Q4 shareholder letter, the company paints a picture that it overcame strong dollar headwinds internationally:
…we stayed profitable in Q4 despite foreign exchange headwinds…[and] we expect similar modest operating income results for Q1 assuming current foreign exchange[.]"
So why would we expect these headwinds to change? Well, the most recent quarter has been a bit of a turning point for the US dollar. The Financial Times sums up the weaker dollar this quarter:
The dollar has weakened 4.1 per cent this year against its biggest trading partners. This may well be the result of deliberate decisions by central banks, even though it is not great for the eurozone, which has seen the euro rebound 4.9 per cent this year against the dollar this year…."
We believe the dollar's easing may actually impact international companies like Netflix. The above-mentioned currency "headwinds" have blown less violently over the last few months. In turn, Netflix should be able to deliver better than the $120mn loss expected in international markets. This could directly impact operating income results and be a positive for the stock.
In LPL Research's Q1 2016 earnings preview, Burt White highlights the drag the strong US dollar had on earnings in 2015, and how that trend may have be abating with the weak Q1 for the dollar:
We also firmly believe that the story of the dollar's weakening in Q1 should play out on corporate balance sheets this earnings season, with Netflix no exception. We saw CFO David Wells cite the foreign exchange headwinds, but now agree that the excuses on currency will carry less merit going forward.
How Else Can Netflix Beat Expectations?
Netflix issued guidance of a $120mn loss internationally, while generating roughly 1.8bn in revenues, adding 1.75mn subscribers in the US and 4.35 subscribers abroad.
Should the company deliver higher subs and revenue, against the climate of the "earnings recession" that analysts expect to impact many of the companies in the S&P, we believe the stock can trek higher.
We are most interested in how the currency exchange troubles that have plagued companies like Netflix have abated during the first quarter of the year. The analysts on the call should certainly press management on the "excuse" of the US dollar given its performance during the quarter, and we hope to understand how Netflix has benefited, if at all.
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.