Interactive Investor

ii view: Netflix reports strong overseas additions

The streamer just had its first period battling competition from Disney and Apple. How did it do?

22nd January 2020 11:30

Keith Bowman from interactive investor

The streamer just had its first period battling competition from Disney and Apple. How did it do?

Fourth-quarter results

  • Revenue up 31% to $5.47 billion
  • Paid net subscriber adds up 20% or 8.76 million to 167 million from Q4 2018
  • Net income up 338% to $587 million
  • Earnings per share up 333% to $1.30

Guidance:

  • For Q1 2020, expects global paid net subscriber adds of 7 million vs 9.6 million in Q1 2019
  • Q1 earnings per share of $1.66

ii round-up:

Streaming service Netflix (NASDAQ:NFLX) reported gains in overseas subscribers which comfortably beat analyst forecasts in these fourth-quarter results. 

International paid subscribers increased by 8.33 million, ahead of forecasts nearer to 7 million. Total global paid memberships rose by 20% year-over-year to 167 million, with paid subscribers outside of its home North American market surpassing 100 million. 

But subscriber gains in the US and Canada proved less favourable. An increase of 550,000 fell short of analyst hopes for closer to 600,000. Management pointed to recent price changes and to the launch of rival services in its home US market. 

Both revenue and earnings per share for the quarter beat expectations, although subscriber guidance for the next quarter disappointed. Group estimates for 7 million net new viewers was below forecasts nearer to 8 million. 

The share price swung between marginal gains and losses in after-hours US trading. 

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 outside the US has been rapid, with 2018 revenues split almost evenly between North America and overseas.  

But competition has been growing. Along with existing services from Amazon (NASDAQ:AMZN) and Hulu, both Walt Disney (NYSE:DIS) and Apple (NASDAQ:AAPL) have recently launched their own streaming services. AT&T's (NYSE:T) WarnerMedia service is due to launch in May and Comcast's (NASDAQ:CMCSA) NBCUniversal service rolls out in the US in July. 

These latest Netflix results suggest that it is still too early to gauge the full impact from growing competition. Understandably cautious 2020 guidance must be weighed against prior management comments embracing competition, and its belief that the likely outcome will be to accelerate the shift from linear TV to on demand consumption. That will put more traditional TV companies under pressure.

For investors, a one-year prospective price/earnings (PE) ratio of around 100 against a three-year average of over 180 suggests the removal of some early investor enthusiasm. Although not directly comparable, Disney sits on a one-year prospective PE ratio of under 30. Amazon trades on 90x. Netflix is a class act, but it must work hard to keep growing its subscriber base at anything like the current rate. As we've seen in the past, highly rated stocks get punished if they disappoint.

Positives: 

  • Revenues and paid memberships still rising
  • Record Q4 subscriber gains in all three geographical regions outside the US

Negatives:

  • Growing competition from Disney, Apple and others
  • Disney yet to fully launch its streaming service overseas

The average rating of stock market analysts:

Buy

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