Netflix Faces Content Shakeup As It Reports Q2 Earnings

Streaming service provider Netflix, Inc. NFLX potentially faces several challenges in holding onto its market share as it prepares to release Q2 earnings after the closing bell Wednesday.

By the looks of its soaring stock this year, however, investors so far seem to see little cause for concern. NFLX shares are up about 40% since the start of the year even as companies like Apple Inc AAPL announced plans to ratchet up their streaming game. The momentum is nothing new to NFLX. In the past five years, its shares have climbed about 488%.

Still, the road ahead for NFLX appears to have a few bumps. For one, some of its contracts to exclusively stream popular sitcom content will expire soon, and others have already snapped up those licensing agreements. For another, both the rise of other streaming services and other electronic media like gaming are putting pressure on NFLX’s market share of viewers.

Netflix is Losing a Grip on Some Key Content

With a dwindling sitcom library, NFLX recently learned that when its contract with NBCUniversal to stream The Office expires in 2020, it will not have the option to renew it. Instead, Comcast-owned NBCUniversal has plans for its own streaming service, which will have the exclusive rights to The Office. Similarly, NFLX is losing the exclusive rights to Friends, which will be aired by AT&T Inc T subsidiary WarnerMedia’s upcoming HBOMax starting early next year.

In addition, NFLX is poised to lose a good chunk of its content library if Walt Disney Co DIS, Warner Bros. and Comcast Corporation CMCSA withdraw other programs, which they seem likely to do as they pursue their own businesses. DIS has said it will launch its own streaming service, Disney+, in November. HBOMax is scheduled to launch in the spring of 2020 with 10,000 hours of premium content, but WarnerMedia has not released any details on the subscription plan.

Without these contractual obligations, NFLX does have more cash to spend. With it losing content, odds are that it’s primed to spend even more money on producing more of its own original programming, analysts said. Of course, that can become expensive quickly. Last year, NFLX spent $12.04 billion on content, up from $8.9 billion in 2017.

So far, NFLX has excelled at providing programming that’s free of commercials. We’ll have to see if it can continue with that business model, or if it will be forced to tap another source of revenue with ads during its shows. Watching Netflix shows with ads would arguably take away some of its magic.

Netflix’s Past Performance

In its last quarterly report, NFLX’s earnings were better than expected – 76 cents per share, up from 64 cents a year prior and above the 58 cents analysts were expecting. It also added 9.6 million new paying subscribers, a record number and one which CEO Reed Hastings called a “phenomenal start” to the year. For NFLX, subscriber numbers are arguably more important than its quarterly financial performance because they provide an indicator of where the company is heading, especially as competition heats up.

Still, NFLX shares dipped on concerns about how it might perform for the rest of the year. The company’s guidance for Q2, with it expecting $0.56 per share, was well below Street expectations of $0.99 per share. So far, NFLX has gotten away with not releasing ratings, but we’ll see whether that can continue.

For Q2, the third-party consensus earnings is still $0.56 per share, compared with $0.85 a year ago. Revenue is projected to rise to $4.93 billion, up from $3.91 billion last year. NFLX said it expects to add 5 million net additions globally in Q2, but it only expects 300,000 new U.S. subscribers.

Still, keep in mind that Wall Street generally has low expectations for what S&P 500 companies will post this quarter as a result of broader economic concerns like tariff issues. In fact, many analysts expect a roughly 1% year-over-year decline in earnings on aggregate this season. The other side of that coin is that analysts were also calling for a similarly rough Q1, but in fact S&P 500 companies drew about a 3% year-over-year increase.

Netflix Options Activity

Options traders have priced in a 6.75% stock move in either direction around the coming earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform. Implied volatility was at the 38th percentile as of this morning.

Put options have been active at the weekly 360, 350, and 340 strikes, while call option activity has been heaviest at the 390 and 400 strikes.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

Figure 1: PAUSING MID-STREAM: Shares of Netflix (candlestick) have soared this year, but they seem to be dragging a little over the last week as earnings approach. The S&P 500 Index (purple line) outperformed NFLX recently. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

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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