Netflix Remains Bullish on Strong Subscriber Growth

Netflix Remains Bullish on Strong Subscriber Growth

 
In our July 18th report, we had forecasted a rally in the stock of Netflix Inc. (NASDAQ: NFLX). Furthermore, we had also informed our interest to take a long position in the counter by purchasing a call option. The stock was trading at about $158 at that time. The stupendous fiscal 2017 second-quarter results enabled the stock to hit a new yearly high of $191.50 last week. We anticipate the stock, which closed at $181.66 yesterday, to move up higher in the days ahead due to reasons mentioned below.

Aided by a strong growth in streaming revenue, the online content provider reported Q2 2017 revenues of $2.79 billion, up from $2.11 billion in the prior year period, and greater than analysts’ estimates of $2.76 billion.

Net income in the recent quarter increased to $65.60 million, from $40.76 million in the corresponding period of 2016. On a per share basis, the earnings grew to $0.15, from $0.09 per share, but lower than Consensus estimates of $0.16 per share.

During the quarter, Netflix added 5.2 million streaming customers and surpassed analysts expectation of an addition of 3.2 million customers worldwide. In particular, the company enrolled 4.14 million non-US subscribers, against FactSet analysts expectation of 2.59 million. In the US, Netflix signed up 1.07 million customers and exceeded analysts’ average estimate of 631,000.

At the end of second-quarter, for the first time, Netflix had more customers outside the US (52.03 million global customers and 51.92 US subscribers).

In a letter to shareholders, the company stated that it expects to report first full-year profit for overseas market in 2017.

The company is spending as much as $6 billion per year on original content creation as it enables winning customers at a rapid pace. Netflix aims to become the world’s leading movie and TV streaming service by creating content in multiple languages targeting customers in different countries.

The marketing costs increased to $274.3 million in the second quarter of 2017, from $216.3 million in the prior year’s corresponding quarter. Due to an increase in expenses, Netflix anticipates a negative free cash flow of between $2 billion and $2.5 billion in fiscal 2017. The company had forecast a negative free cash flow of $2 billion in the previous quarter.

Looking ahead, the company expects 3Q17 earnings of $0.32 per share on revenues of $2.97 billion. The market anticipates Netflix to report earnings of $0.23 per share on revenues of $2.87 billion. Netflix stated that it aims to add 4.4 million subscribers (3.65 million global customers and 0.75 million US clients) in the current quarter. The Street Account analysts forecast addition of 3.925 million subscribers.

Considering the fact that the US subscriber additions have reached the 2014 and 2015 level, Richard Greenfield, analyst at BTIG has issued a target price of $225 for the stock. On the basis of strong Q2 results, impressive subscriber additions, and overwhelmingly positive outlook, we expect the stock to remain bullish in the weeks ahead.

The price chart indicates consolidation at 182 levels. The DeMarker indicator is in the bullish zone, while the ‘on balance volume’ indicator is rising. Thus, we can anticipate the stock to scale upwards to reach the yearly high level recorded in mid-July.

Netflix - Technical Analysis - 1st August 2017

To capitalise on the prevailing bullishness, we are looking at the possibility of buying a call option valid until August 9th. The option would be bought only when the price trades near $182 in the NASDAQ.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.


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