Netflix Is Spending To Grow

Let’s look at the earnings of all the TFAANG names because they are the market leaders. It will be tough for the S&P 500 to make a new all-time high if the momentum growth stocks don’t rally. Netflix is the poster child for this segment because it has a high multiple and high cost growth, but also high subscriber growth. Spending for growth is working for them for now, but the bears are wondering if the firm will be able to raise prices enough to start earning enough profits to justify its valuation. The firm needs to do this while competing with Disney which will be launching its own monthly service. That’s the basics of the Netflix debate which happens every quarter. It’s a weird situation in that the debate never changes even after each quarter. The reason for that is because the market is always focused on subscriber growth in the near term, but bears think costs need to be focused on.

Netflix Beats Estimates & Issues Great Subscriber Guidance

Let’s also look at the latest numbers and then review some analysis of the stock. EPS was 64 cents which met expectations. The current EPS doesn’t matter much to the stock because the multiple is incredibly high whether it beats by a few pennies or doesn’t. The consensus forecast for 2019 is $4.29 which means the 2019 PE multiple is 78. Revenue was $3.7 billion which slightly beat estimates for $3.69 billion. As I mentioned, the stock trades on streaming adds. Net adds were 7.41 million which beat estimates for 6.5 million. That sent the stock up 9.19% on Tuesday. Domestic adds were 1.96 million which beat estimates for 1.48 million; international net adds were 5.46 million which beat estimates for 5.02 million. Free cash flow was negative $287 million as the firm reinvests its subscriber revenue back into new content.

The chart below gives a complete summary of the recent reports. As you can see, the total subscriber growth quarter over quarter can be inconsistent. The bad news is that sometimes Netflix is bullish, but results miss estimates. The good news is subscribers are up 50% from last year which shows how powerful the brand and the service are. The key differentiation Netflix has is the ability to pick great original content and match users with the shows they are most likely to binge watch. The ultimate goal is to have the collection of content be worth more than the cost. Getting users to pay for those differentiation points make Netflix a valuable business.