Can Netflix's Q2 Earnings Propel The Stock To Record Territory?

Netflix, Inc. NFLX's second-quarter results are likely to provide evidence of how well the company is gaining traction from its thrust towards original content. The company's focus to capitalize on the underpenetrated international markets present a good opportunity for it to continue its stellar performance in the near to the medium term.

The company is scheduled to report its second-quarter results after Monday's close.

"The quarter had strong original content offering including '13 Reasons Why' which was released at the very end of the first quarter and the fifth seasons of both House of Cards -Season 5 and Orange is the New Black, although the latter two shows appear to be aging and show slightly less interest than prior years on Alphabet Inc GOOGL GOOG's Google trends," Alan Gould of Rosenblatt Securities said in a note. The firm expects 3.57 million net adds this quarter.

Key metrics to watch include:

• Net subscriber additions
• Net subscriber addition-guidance
• Contribution profit margin, which is revenues less cost of revenues and marketing expenses divided by total revenues, expressed as a percentage.

Q2 Expectations

Analysts, on average, expect the company to report earnings of 16 cents per share, down from 24 cents per share in the year-ago period. Meanwhile, sales are expected to increase 31.20 percent year-over-year to $2.76 billion. The company guided second-quarter earnings to 15 cents per share and revenues to $2.755 billion.

Netflix looks to add 600,000 million subscribers domestically, on a net basis compared to 2.60 million internationally. The net adds growth guidance is considered to be calculated from a low base from the un-grandfathering that happened last year.

In the last four quarters, the company has reported better-than-expected bottom line results in all of the four quarters. Earnings per estimate has come down significantly from 24 cent-estimated 90 days ago to the current 16 cents.

Mixed Q1

In the first quarter, Netflix reported earnings per share of 40 cents on 34.7 percent revenue growth to $2.64 billion. The company's operating margin improved to 9.7 percent.

Domestic streaming revenues, accounting for 55.7 percent of the total revenues rose 26.6 percent. At the same time, international streaming revenues improved about 60 percent. Net subscriber additions in its domestic segment were 1.42 million, down from 2.23 million last year and 1.93 million in fourth quarter of 2016. Net adds in the international segment were at 3.53 million.

Although earnings topped expectations and revenues came in line, net subscriber additions disappointed, triggering an initial downward move in after-hours trading on March 17. However, the stock gained modestly the next session, although it went through a post-earnings retreat,before getting back to pre-earnings level within six sessions.

Rosenblatt expects the company to guide third-quarter net adds of 3.58 million, helped by an easier domestic comp due to continued un-grandfathering and no competition from the Olympics this year. However, offsetting effect is to come from the continued benefit from the big international expansion last year and the success of "Stranger Things," which was released in the third quarter last year.

On the company's investments, Rosenblatt said, "Netflix is building a content moat and amortizing it over a global direct-to-consumer audience. We project NFLX will be spending $15 billion per year on content in five years and $25 billion annually in ten years."

Stock Take

Over the past year, the stock has gained about 66 percent, although it gained a mere 1.08 percent for the second quarter. The stock suffered along with the market-wide tech selloff seen in June after hitting an all-time high of $165.88 on June 8. At the end of the second quarter, the stock hit a key support around the $152 area but managed to rally-off it and is now around a resistance area around $163.

NFLX Source: Y Charts

If the earnings prove to be a positive catalyst, the stock could rally to challenge this all-time closing high. The $157.5 area could prove to be a support in the eventuality of a pullback. Rosenblatt has a Neutral rating and a $155 price target for Netflix's shares.

Related Links:

This Earnings Season Made Netflix The Top Long-Term Internet Pick

Analysis: Why Netflix Remains 'Best Idea In The Media Industry'