Monday, July 10, 2017

Netflix Earnings: We'll Show You How We Get Blow Out Upside For Next Week's Report


Netflix (NFLXearnings date is this coming Monday, July 17th, after the market close. (Netflix Earnings Call Link) Our Netflix estimates show they can blow away Street expectations by $.18 which would be big. That said the stock is way too expensive for us so we’re on the sidelines. The stock reaction history on earnings is mixed and volatile.  

What Can Drive That Type Of Earnings Upside For Netflix Stock?

After growing revenues in the 20s%, growth accelerated to about 35% in the last two quarters. We’re assuming the growth can continue. The sales acceleration is a sign that the company is hitting stride. For modeling purposes we don’t have to assume that the trend slows until we have to face the recent pickup in trends which isn’t until Q3 or Q4.

Fundamentals can drive second quarter even more so than first quarter.

First quarter earnings growth was driven by new titles. You have more visibility for growth in the second quarter because it’s driven by new seasons of past successes like House of Cards. That growth should be more dependable than relying on the success of newer titles.

The gross margin jump we saw in first quarter means the company leveraged its video spending more than in the past. 

If revenues stay strong this is the key to the earnings leverage and upside now that they are nicely leveraging their video spend. That's a big story for earnings.

Why We’re Not Buying Netflix?

If you love Netflix for sure you can buy the stock for a longer term investment. 

For us, we need over 25% upside in our target price versus current levels to be bullish. 

We have $2.00 for next year’s numbers which assumes about 40% growth off of our already-above-the-street numbers for this year. The most we could see paying PE-wise (Price to Earnings) on next year’s numbers is 40-50x. 

50X$2.00= $100. The stock trades at $150. It’s not for us.

We admit that typically we like to look at the historical PE average which is way above 100x. Still for us, it's too expensive for what it is. We may be missing it but we're ok with that.

If you love Netflix though and have a longer time horizon than 12 -18 months and want to tuck it away we don’t argue against that strategy really for any stock you love. 

We think however that with 10% EBIT margins the stock doesn’t deserve a 100X PE. 

There are much better margin producing companies with good growth characteristics that are much cheaper. You don’t have to own everything.

Let’s Wrap It Up

No doubt, Netflix is doing some amazing things. We are not buying it on take-over speculation. Video is going to be a crowded, competitive space. That said, earnings should blow away Street expectations which can help the stock near term but we don’t have the upside visibility to own it longer term.
By: Chaim Siegel, Elazar Advisors, LLC 
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