Netflix Stock Looks Risky Ahead Of Q1 Earnings As Competition Looms
Investing.com | Apr 16, 2019 02:46AM ET
* Reports Tuesday, April 16, after the close
* Revenue Expectation: $4.5B
* EPS: $0.57
Netflix Inc. (NASDAQ:NFLX) hasn't given its investors much cause for complaint in its performance so far. Its stock has delivered explosive returns since it began trading in 2002, rising some 30,000% in under 20 years. Shareholders loved Netflix shares for one primary reason: the company continues to show impressive subscriber growth, the bottom-line number most analysts and investors focus on.
In the past five years alone, Netflix stock jumped over 600% as the streaming giant continued its growth momentum, acquiring over 60 million subscribers in the U.S. and 139 million globally on the back of its strong content and the technology that no one could match.
But that winning combination is going to face its first big challenge this year as much bigger and deep-pocketed rivals, including Disney (NYSE:DIS) and Apple (NASDAQ:AAPL), make a bigger push into video streaming. This looming threat is one of the most pressing issues Netflix must address when it announces its first-quarter earnings after market close today.
Netflix has lost about $10 billion in market value since Disney presented details of its flagship streaming service, Disney+, on Thursday. While Disney surged to a record high after the announcement, Netflix stock continues to face pressure. The shares fell 4.5% on Friday, and continued to slide yesterday, losing a further 0.7% to close at $348.87.
Disney's announcement of its response to Netflix’s disruptive technology and rich content, with plans to launch Disney+ on Nov. 12 at a price of $7 a month, undercuts Netflix significantly—the online streaming service's most popular U.S. plan costs about $11 a month.
h2 Two Red Flags for Netflix Investors/h2The most problematic issue facing Netflix amid this onslaught of new streaming services will be protecting its home turf, where growth is already plateauing. Netflix expects to add 1.6 million new paying customers in the U.S. in Q1, down from the 2.3 million it added in the same period a year ago.
So far, investors were willing to ignore that deceleration in growth as Netflix compensated this slackness by adding more subscribers globally. In the earnings release today, there is a good chance that Netflix will produce another healthy quarter for its global growth as that area has little competition to deal with.
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But maintaining that competitive advantage may not be easy going forward, especially when Disney — armed with Fox content and some of its best titles, including “The Simpsons,” the Marvel and Star Wars franchises and content from the National Geographic Channel — starts grabbing subscribers’ attention.
Another potential red flag is that Netflix is pursuing a risky growth model based on borrowing from credit markets to fund new programming as well as its marketing budget. While reporting its Q4 numbers, Netflix disclosed that it expects to spend about $3 billion more than it takes in during 2019. This would make it the company’s sixth straight year of burning cash.
Bottom Line
As we've pointed out in earlier articles, risks to Netflix's powerful ascent are growing and its stock’s recent performance is clearly reflecting that. During the past six months, the upward trajectory of Netflix shares has stalled and it seems the company’s rich valuations are playing a role here. Netflix is valued at 47x estimated EBITDA compared with the average multiple for U.S. media giants of 9x, according to Bloomberg data.
For cautious investors, this is the right time to book some profit and reduce holdings. One way to play this trade is to take an equal position in both Netflix and Disney stocks and hedge your bets. In our view, it will take a lot of pain and cash for companies like Disney to dislodge Netflix and prove that they’re a substitute for its powerful platform. On the other hand, a little quarterly miss at this stage would trigger a much bigger sell-off in Netflix’s shares.
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