Why Is Netflix (NFLX) Up 18.5% Since Last Earnings Report?

A month has gone by since the last earnings report for Netflix (NFLX). Shares have added about 18.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Netflix due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Netflix Q4 Earnings Crush Estimates, Revenues Up Y/Y

Netflix reported fourth-quarter 2019 earnings of $1.30 per share that beat the Zacks Consensus Estimate by a massive 150% and jumped 333.3% year over year.

Earnings benefited from tax adjustments owing to final regulations on certain aspects of the 2017 U.S. tax reform issued by the U.S. Treasury.

Revenues of $5.47 billion increased 30.6% year over year and beat the consensus mark of $5.44 billion. Excluding a negative impact of $133 million related to unfavorable foreign exchange, streaming ARPU grew 12% from the year-ago quarter.

Netflix added 8.76 million paid subscribers globally, which decreased 0.9% year over year but was better than management’s guidance of 7.60 million.

At the end of 2019, Netflix had 167.09 million paid subscribers globally, up 20% from the year-ago quarter and better than management’s expectation of 165.93 million paid subscribers, globally.

Segment Revenue Details

UCAN reported revenues of $2.67 billion, which rose 23.6% year over year and accounted for 48.9% of total revenues. ARPU grew 17.2% from the year-ago quarter.

Paid subscriber base increased 4.5% from the year-ago quarter to 67.66 million. However, the company added 0.55 million paid subscribers, down 68.6% year over year.

EMEA reported revenues of $1.56 billion, which surged 42.5% year over year and accounted for 28.6% of total revenues. ARPU at constant currency (cc) grew 7% from the year-ago quarter.

Paid subscriber base increased 36.9% from the year-ago quarter to 51.78 million. The company added 4.42 million paid subscribers, up 11.1% year over year.

LATAM reported revenues of $746 million, increasing 31.6% year over year and accounting for 13.6% of total revenues. ARPU at cc grew 18% from the year-ago quarter.

Paid subscriber base rose 20.5% from the year-ago quarter to 31.42 million. The company added 2.04 million paid subscribers, up 4.1% year over year.

APAC reported revenues of $418 million, which jumped 50.9% year over year and accounted for 7.6% of total revenues. ARPU at cc was unchanged on a year-over-year basis.

Paid subscriber base soared 53% from the year-ago quarter to 16.23 million. The company added 1.75 million paid subscribers, up 52.2% year over year.

Overall, in international streaming markets, Netflix’s subscriber growth continued unabated. The company ended the fourth quarter with 106.05 million paid subscribers, up 31.3% from the year-ago quarter. The company added 8.33 million paid members, up 14% year over year.

However, price hike and increased competition from the launch of streaming services by Disney and Apple impeded growth in the United States.

In the domestic streaming market, Netflix’s paid subscriber base totaled 61.04 million at the end of the fourth quarter, up 4.4% from the year-ago quarter. The company added 0.4 million paid subscribers, down 72.3% year over year.

Content & Viewership Details

Netflix’s fourth-quarter content slate included The Crown, Big Mouth, You, Rhythm & Flow, American Son, Turkish series The Gift and French film Banlieusards (aka Street Flow).

Netflix’s The Witcher is on track to be the biggest season-one TV series ever in the company’s history. Through its first four weeks of release, 76 million member households chose to watch this action-packed fantasy, starring Henry Cavill.

Beginning the fourth quarter, Netflix changed its viewership count methodology. The company is now reporting on households (accounts) that choose to watch a given title. This is much similar to the BBC iPlayer’s rankings, based on “requests” for the title, “most popular” articles on the New York Times (including those who opened the articles) and Alphabet division YouTube’s view counts. The new metric shows roughly a 35% hike, on average, over the prior metric.

Moreover, the company’s 6 Underground movie, directed by Michael Bay and starring Ryan Reynolds, attracted 83 million member households in its first four weeks.

Netflix has received 24 Academy Award nominations across eight different films. The nominated feature films include The Irishman, Marriage Story and The Two Popes.

Sergio Pablos’ Klaus, Netflix’s first original feature-length animated film, was also nominated for an Academy Award. In its first 28 days, 40 million members chose to watch Klaus.

Other Details

During the reported quarter, Netflix launched a low-priced mobile plan in Malaysia and Indonesia.

Content slate for the first quarter of 2020 includes returning seasons of Sex Education, Altered Carbon, Narcos: Mexico, the Spanish series Elite and Korean historical zombie thriller Kingdom. 

New original series include Messiah, docu-series Killer Inside: The Mind of Aaron Hernandez and I Am Not Okay with This.

Moreover, movies include action film Spenser Confidential (starring Mark Wahlberg) and the movie sequel To All the Boys: P.S. I Still Love You.

Moreover, later in 2020, Netflix will premiere Over The Moon from the legendary animator, Glen Keane.

Quarter Details

International Streaming revenues (53.8% of revenues) jumped 39.7% year over year to $2.94 billion. U.S. Streaming revenues (45% of revenues) improved 23.1% from the year-ago quarter to $2.46 billion.

Domestic DVD revenues declined 19.6% year over year to $68.5 million and accounted for 1.2% of total revenues.

Marketing expenses grew 20.3% year over year to $878.9 million. However, as a percentage of revenues, marketing expenses decreased 140 basis points (bps) to 16.1%.

Moreover, consolidated operating income soared 112.5% year over year to $458.5 million. Consolidated operating margin expanded 320 bps on a year-over-year basis to 8.4%.

Balance Sheet & Free Cash Flow

Netflix had $5.01 billion of cash and cash equivalents as of Dec 31, 2019, compared with $4.44 billion as of Sep 30.

Long-term debt was $14.76 billion as of Dec 31, down from $12.43 billion as of Sep 30. The company raised $1 billion 4.875% senior notes and €1.1 billion 3.625% senior notes, both due in 2030, in the reported quarter.

Streaming content obligations were $19.5 billion compared with $19.1 billion at the end of the previous quarter.

Netflix reported free cash outflow of $1.67 billion compared with $551 million in the previous quarter.

Guidance

For the first quarter of 2019, Netflix forecasts earnings of $1.66 per share, implying year-over-year growth of 118.4%.

Netflix expects to add 7 million paid subscribers, lower than 9.60 million added in the year-ago quarter. The company expects to have 174.09 million paid subscribers globally, up 16.9% from the year-ago quarter.

Total revenues, including the DVD business, are anticipated to be $5.73 billion, up 26.8% year over year.

Operating margin is projected at 18%, up from 10.2% in the year-ago quarter.

For 2020, the company expects operating margin of 16%, up 300 bps year over year. It anticipates free cash outflow of approximately $2.5 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 46.74% due to these changes.

VGM Scores

At this time, Netflix has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Netflix has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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