ii view: Netflix membership gains miss forecasts

by Keith Bowman from interactive investor |

TV and movies streamer Netflix has grown rapidly, but faces challenges to keep up the pace. 

Second-quarter results

  • Revenue up 26% to $4.92 billion
  • Net income down 29% to $271 million
  • Earnings per share down 29% to 60 cents

ii round-up:

The company started in 1997 as a DVD rental-by-mail firm. It began streaming content in the US in 2007 and internationally in 2010. It produced its first original TV series in 2013 and went global in 2016. 

Today, internet TV service Netflix Inc (NASDAQ:NFLX) has over 150 million paying flat-fee unlimited viewing subscribers. Its product is available virtually everywhere in the world, except in China. 

For the second quarter, paid memberships grew by 2.7 million, less than the 5.5 million in the second quarter a year ago. Importantly, it was also below management's own 5 million forecast. The missed forecast was spread across all regions, but slightly more so in regions with price increases.

The stock price weakened in after-hours US trading. 

Management pointed to a lack of strong original content and a possible pull of subscribers into what was a strong first quarter when it added 9.6 million paid memberships. 

Looking ahead, management expects third-quarter global paid net membership adds of 7 million, better than the 6.1 million in Q3 2018. Shows such as "Orange is the New Black" and a new season of "The Crown" justify the positive forecast, they say. 

ii view:

In a relatively short time, Netflix has become a household name. The ability to stream and watch drama series or movies at a time convenient to the consumer holds great appeal. The company's expansion overseas has been rapid, with revenues now split almost evenly between the US and international. But there is a growing threat from rival streaming services, particularly entertainment giant Walt Disney (NYSE:DIS), which launches its own version Disney Plus in November, and Apple's (NASDAQ:AAPL) Apple TV+.

For investors, valuing a high-growth stock is never easy. Netflix does now generate a profit, offering a firmer basis on which to try and value its shares. Sat on a one-year prospective price/earnings (PE) ratio of over 100 against a three-year average of over 190 suggests the removal of some early enthusiasm. Although not directly comparable, Disney sits on a one-year prospective PE ratio of under 25. Amazon.com Inc (NASDAQ:AMZN) is similarly at around 70.

Positives: 

  • Revenues and paid memberships still rising
  • New partnership with AT&T in the US to integrate Netflix into its set-top box

Negatives:

  • Second-quarter paid memberships missed company target
  • Growing competition from Disney, Apple and others

The average rating of stock market analysts:

Buy

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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
 

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