ii view: Netflix proves a Covid-19 winner

Growing competition may be temporarily forgotten, but can Netflix stay ahead of the pack?

First-quarter results

• Revenue up 27.6% from Q1 2019 to $5.77 billion
• Global net paid additions up 15.77 million from the last quarter
• Paid net subscriber adds up 22.8% from Q1 2019 to 182.8 million 
• Earnings per share up 106.6% to $1.57

Guidance:

• For Q2 2020, expects global paid net subscriber adds of 7.5 million vs 15.77 million in Q1 2020
• Expects Q2 earnings per share of $1.81

ii round-up:

Benefiting from the stay-at-home requirements under Covid-19, global streaming provider Netflix (NASDAQ:NFLX) blew away forecasts for new quarterly subscribers.

It gained 15.77 million new subscribers in the first quarter, more than double the 7 million new members globally it predicted at its fourth quarter results. 

Efforts to prevent the spread of the pandemic including cancelling major sporting events had fuelled what management believed was likely to be a temporary surge in new customers. 

It is tentatively forecasting new subscribers of 7.5 million in the next quarter, stressing the degree of guesswork involved under the timing of government lockdowns.

Netflix shares rose by more than 10% in after-market US trading and are up over 30% year-to-date. The S&P 500 index is down 15%.

Under Covid-19, and like fellow content producers ITV (LSE:ITV) and Disney (NYSE:DIS), production has been suspended, with near-term disruption expected to be minimal. Cost savings have however provided a boost to cashflow.

The stronger dollar, the result of investors fleeing to the perceived safe haven in a crisis, had also impacted. Set subscription fees in parts of the world such as Brazil had in effect fallen as the dollar rose. As a result, earnings per share of $1.57 missed analyst predictions for an outcome closer to $1.65 per share. 

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. Revenues in 2019 were split almost evenly between North America and overseas.  

These latest results have seen Netflix prove a beneficiary of Covid-19. But competition has been growing. Along with existing services from Amazon (NASDAQ:AMZN) and Hulu, Walt Disney, Apple (NASDAQ:AAPL) and ITV and the BBC have all recently launched their own streaming services. AT&T's (NYSE:T) Warner Media and Comcast (NASDAQ:CMCSA) NBC Universal are also planning similar services. 

For investors, a one-year prospective price/earnings (PE) ratio of around 70 against a three-year average of over 100 suggests the removal of some early investor enthusiasm. Although not directly comparable, Disney sits on a one-year prospective PE of under 35. Amazon is similarly at around 80 times. Netflix previously embraced the growing competition, flagging its belief that the likely outcome will be to accelerate the shift from linear TV to on demand consumption. Covid-19 is for now, helping it on its way. 

Positives: 

• Revenues and paid memberships still rising
• Heavy investment made in building a leadership position

Negatives:

• Growing competition from Disney, Apple and others
• Subject to currency movements

The average rating of stock market analysts:

Buy