Netflix Stock Gets A Pre-Earnings Bump Thanks To Price Hike

Includes: NFLX
by: JJ Kinahan

Video streaming giant Netflix reports earnings after the closing bell.

Its quarterly report comes on the heels of a price hike for U.S. subscribers.

Here’s a look at what might be expected from its results.

Streaming service Netflix (NFLX) is scheduled to report fourth quarter earnings after the closing bell Thursday, Jan. 17. Earlier in the week, NFLX announced that it would be raising prices for U.S. subscribers by $1 to $2 depending on the plan. Investors sent shares up 6.5% on Tuesday following the announcement, as the move is projected to tack on a little more than $1 billion in revenue per year based on current subscriber levels.

Next quarter’s results should reveal the business impact of the price. For the quarter at hand, NFLX is expected to report EPS of $0.24, down from $0.41 in the prior-year period, on revenue of $4.21 billion, according to third-party consensus analyst estimates. Revenue is projected to grow 28% year over year (YoY).

As has been the case in recent reports, subscriber additions, content spending and cash flow and growing competition are likely to be some of the main areas analysts and investors hone in on.

Subscriber Additions

This is typically NFLX’s largest quarter for subscriber additions and it has forecasted that it will add 9.4 million subscribers in the fourth quarter — 1.8 million in the U.S. and 7.6 million internationally. That would bring its total subscriber count in the U.S. to 60.26 million and 86.24 million abroad. One thing to note is that NFLX’s subscriber addition guidance will only include paid memberships starting with this quarter’s report, whereas it previously included people who were on a free trial.

When the company last reported, the stock climbed as much as 15% after subscriber growth beat analyst estimates by a wide margin in both the U.S. and international segments. Some analysts had been concerned that it couldn’t maintain the growth it had in the past as it scales and that the U.S. market was reaching saturation. That report seemed to put those concerns to rest for the time being.

It’s too soon to see if subscriber additions will be impacted by the recent price hikes in the U.S. When the company hiked prices on its premium services in 2017, it indicated it hadn’t seen any major attrition following the move.

Content Spending, Cash Flow and Other Costs

On a profit and loss basis, NFLX had forecasted that it would spend between $7.5 billion to $8 billion on content in 2018. Management has said that will increase in 2019, yet hasn’t provided a specific outlook.

Content isn’t the only area NFLX has been spending more, and at the start of 2018 forecasted marketing spend would rise 56% to $2 billion and technology and development spending would increase 23% to $1.3 billion.

The company’s hefty spending has resulted in a continual cash burn. In October, management said that its free cash flow for 2018 would come in around negative $3 billion and that 2019 would have similar levels. NFLX reported it had raised $2 billion through a debt offering in October, tacking on to its existing $12 billion in debt.

Growing Competition

It’s no secret that there is growing competition in video streaming. Disney (DIS) is rolling out new services and is set to gain majority control of Hulu once its acquisition of assets from 21st Century Fox (FOXA) closes. AT&T (T) has said it is planning a streaming service with its newly acquired Time Warner assets, and Comcast (CMCSA) just announced its NBC Universal division will launch one too. Tack on existing competition like Amazon (AMZN) and players like Apple (AAPL) reportedly working on their own services, and the market is a far cry from what it was just a few years ago.

NFLX CEO Reed Hastings has regularly acknowledged direct competition, as well as video games, social media, magazines, and all the other forms of entertainment the company is up against. In last quarter’s investor letter, he said “our job is to make Netflix stand out so that when consumers have free time, they choose to spend it with our service.” One part of the company’s strategy to do that has been to increasingly produce original content that viewers can’t get anywhere else.

Wild Ride. In December, NFLX got all the way back down to $230, close to where it started the year, after peaking at an all-time high of $423.21 in June. The stock snapped back once it got down to that major area of support and has rallied all the way back to above $350. The past few days, the stock has struggled to get over the $360 mark, a level of resistance. Chart source: Thinkorswim by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Netflix Options Activity

Options traders have priced in a 7.2% ($25.30) stock move in either direction around NFLX’s earnings release, according to the Market Maker Move indicator on the Thinkorswim platform. Implied volatility was at the 61st percentile as of this morning.

In short-term trading at the Jan. 18 monthly expiration, calls have been active at the 350 and 360 strike prices. On the call side there also has been higher volume at the 380 and 400 strikes, a ways out of the money. For puts, recent volume has been concentrated at the 345 and 350 strikes. The 355-strike put has also been active and the stock was briefly trading above that level on Tuesday.

There hasn’t been much activity in the next several weekly expirations that stands out. At the Feb. 15 monthly expiration, calls have been active at the 350 strike while puts have been active at the 330 and 340 strikes.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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. I have no business relationship with any company whose stock is mentioned in this article.