Streaming service Netflix, Inc. (NASDAQ: NFLX) is scheduled to report fourth-quarter earnings after the closing bell
Thursday, Jan. 17. Earlier in the week, NFLX announced that it would be raising prices for U.S. subscribers by $1 to $2 depending
on the plan. Investors sent shares up 6.5% on Tuesday following the announcement, as the move is projected to tack on a little over
$1 billion in revenue per year based on current subscriber levels.
Next quarter’s results should reveal the business impact of the price. For the quarter at hand, NFLX is expected to report EPS
of $0.24, down from $0.41 in the prior-year period, on revenue of $4.21 billion, according to third-party consensus analyst
estimates. Revenue is projected to grow 28% year over year (YoY).
As has been the case in recent reports, subscriber additions, content spending and cash flow, and growing competition are likely
to be some of the main areas analysts and investors hone in on.
Subscriber Additions
This is typically NFLX’s largest quarter for subscriber additions and it has forecasted that it will add 9.4 million subscribers
in the fourth quarter—1.8 million in the U.S. and 7.6 million internationally. That would bring its total subscriber count in the
U.S. to 60.26 million and 86.24 million abroad. One thing to note is that NFLX’s subscriber addition guidance will only include
paid memberships starting with this quarter’s report, whereas it previously included people that were on a free trial.
When the company last reported, the stock climbed as much as 15% after subscriber growth beat analyst estimates by a wide margin
in both the U.S. and international segments. Some analysts had been concerned that it couldn’t maintain the growth it had in the
past as it scales and that the U.S. market was reaching saturation. That report seemed to put those concerns to rest for the time
being.
It’s too soon to see if subscriber additions will be impacted by the recent price hikes in the U.S. When the company hiked
prices on its premium services in 2017, it indicated it hadn’t seen any major attrition following the move.
Content Spending, Cash Flow and Other Costs
On a profit-and-loss basis, NFLX had forecasted that it would spend between $7.5 billion to $8 billion on content in 2018.
Management has said that will increase in 2019, yet hasn’t provided a specific outlook.
Content isn’t the only area NFLX has been spending more and at the start of 2018 forecasted marketing spend would rise 56% to $2
billion and technology and development spending would increase 23% to $1.3 billion.
The company’s hefty spending has resulted in a continual cash burn. In October, management said that its free cash flow for 2018
would come in around negative $3 billion and that 2019 would have similar levels. NFLX reported it had raised $2 billion through a
debt offering in October, tacking on to its existing $12 billion in debt.
Growing Competition
It’s no secret that there is growing competition in video streaming. Walt Disney Co (NYSE: DIS) is rolling out new services and is set to gain majority control of
Hulu once its acquisition of assets from 21st Century Fox (NASDAQ: FOXA) closes, AT&T Inc. (NYSE: T) has said it is planning a streaming service with its newly acquired Time Warner
assets and Comcast Corporation (NASDAQ: CMCSA) just announced its NBCUniversal division will launch one too. Tack on
existing competition like Amazon.com, Inc. (NASDAQ: AMZN) and players like Apple Inc (NASDAQ: AAPL) reportedly working on their own services, and the market is a far cry
from what it was just a few years ago.
NFLX CEO Reed Hastings has regularly acknowledged direct competition, as well as video games, social media, magazines, and all
the other forms of entertainment the company is up against. In last quarter’s investor letter, he said “our job is to make Netflix
stand out so that when consumers have free time, they choose to spend it with our service.” One part of the company’s strategy to
do that has been to increasingly produce original content that viewers can’t get anywhere else.
Wild Ride. In December, NFLX got all the way back down to $230, close to where it started the year, after
peaking at an all-time high of $423.21 in June. The stock snapped back once it got down to that major area of support and has
rallied all the way back to above $350. The past few days, the stock has struggled to get over the $360 mark, a level of
resistance. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance
does not guarantee future results.
Netflix Options Activity
Options traders have priced in a 7.2% ($25.30) stock move in either direction around NFLX’s earnings release, according to the
Market Maker Move indicator on the thinkorswim® platform. Implied volatility was at the 61st percentile as of this
morning.
In short-term trading at the Jan. 18 monthly expiration, calls have been active at the 350 and 360 strike prices. On the call
side there has also been higher volume at the 380 and 400 strikes, a ways out of the money. For puts, recent volume has been
concentrated at the 345 and 350 strikes. The 355-strike put has also been active and the stock was briefly trading above that level
on Tuesday.
There hasn’t been much activity in the next several weekly expirations that stands out. At the Feb. 15 monthly expiration, calls
have been active at the 350 strike while puts have been active at the 330 and 340 strikes.
Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any
particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with
each strategy, including commission costs, before attempting to place any trade.
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