Netflix’s stock hit a new high of $133.70 at the close of trading on Friday as investors are expecting big things out of the company and its upcoming fourth quarter earnings report on Wednesday. The Investors’ Business Daily reports that Netflix (NASDAQ:NFLX) is expected to report earnings of 13 cents per share, surpassing last year’s fourth quarter earnings report by 30 percent. Netflix is accruing more subscribers than ever and is making a push both for international audiences thanks to new original content.
Netflix’s push for original content is crucial as it seeks to distinguish itself from rising competition and will help it grow its subscriber base. But there are concerns such as how much more Netflix can grow internationally, which are only compounded by its high price and the potential end of neutrality. Investors interested in the long term should hold on Netflix, though buying in the short term is fine as well.
Retaining Customers
While revenue, earnings per share, and normal metrics will be important to measure Netflix’s health, the one number which investors will pay attention to in this earnings report is Netflix’s subscriber growth. A few months ago, analysts were worrying about how Netflix would be affected by the rise in competition from HBO Now and Amazon Prime. The recent announcement that Apple TV will be making its own push for original content by the end of 2017 is certainly not good news for Netflix as well, as Apple has massive cash reserves and a loyal fan base to make it a serious threat.
But Netflix has managed to get past these concerns with its own high-quality original shows, and one formerly pessimistic analyst has upgraded his forecast from sell to hold largely because of shows like “The Crown” and “Luke Cage.” Bryan Kraft with Deutsche Bank noted that he expects Netflix to add 4.35 million international subscribers compared to company expectations of 3.35 million, and that this growth is because of “broad based strength in international demand catalyzed by original content.”
But while investors should expect good growth numbers for this earnings report, we do have to wonder just how much more Netflix can grow internationally. Netflix announced last October that it would be scrapping plans to try and bring its service to places like China and Costa Rica, which is not surprising given the regulatory problems and mass piracy rampant within those countries. But Netflix is going to face challenges offering its services for sale in Western Europe and any setback will see investors get nervous given the company’s exorbitant price to earnings ratio.
Fortunately, the company is working on improving its earnings by raising prices and the fact that Netflix will be able to keep subscription growth despite the price increase is a good sign.
The Net Neutrality Problem
I expect Netflix to surpass expectations both on earnings and in subscribers on Wednesday, and the stock should thus go up over the short term like it has over the past year. But Netflix is a volatile stock which will rise and fall based on the slightest fear around subscriber additions.
And while Netflix is looking at increasing its earnings and expanding domestically, it should also be noted that it is the one company which could lose more than any other under a Trump administration. Political and financial analysts have speculated that Trump and the Republicans will destroy net neutrality, which forces Internet service providers like Comcast to give Netflix the same Internet speeds as their own streaming services. If net neutrality was repealed, ISPs could charge Netflix fees and throttle their Internet speed, causing frustrated customers to turn away from Netflix and to the ISPs’ streaming services.
It should be noted that while Republicans have opposed net neutrality, there is no guarantee that Trump will overturn it given his unpredictability, especially if the public reacts poorly to repealing net neutrality as they have in the past. But the possibility of a repeal is much likelier than it was under the Obama administration and would represent a serious blow to Netflix.
Don’t Overreact
As noted above, Netflix should do well in its earnings report on Wednesday and the stock will rise as a result. But its recent stock growth is that of a company where everything is going fine, and there are real problems which surround this company such as its ability to grow internationally and the effects of a net neutrality repeal. Aggressive investors should consider buying Netflix in the short term and reaping the benefits of a price increase after the earnings report is released, but investors focused on the long term should hold. While Netflix’s subscription numbers are important, investors should also look at how it will increase earnings as well as the prospect of a net neutrality repeal from Washington in the coming months.