Earlier this week, on-demand video service provider Netflix Inc. (NASDAQ: NFLX) reported fiscal 2017 first-quarter earnings that beat analysts’ estimates. Additionally, the revenues were in line with the market’s expectations. Following the results, the stock has lost about $8 so far to close at $139.76 yesterday. However, we anticipate the downtrend to continue in the short-term due to the facts provided below.
The leading internet television network reported a 34.7% increase in the first-quarter revenues to $2.64 billion, from $1.96 billion in the first quarter of fiscal 2016. The reported revenues were in line with the Wall Street estimates.
For 1Q17, the California-based company posted earnings of $178.22 million, up 535.7% from $27.66 million in the 1Q16. On a per-share basis, the Q1 2017 earnings increased to $0.40 per share, from $0.06 per share in Q1 2016, and above analysts’ estimates of $0.37 per share.
Even though the results are impressive, the subscriber additions are not. In the US, the company enrolled 1.42 million subscribers in the recent quarter, against analysts’ expectations of 1.56 million additions. Net international subscriber additions were 3.53 million, compared with the FactSet analysts’ estimates of 3.71 million. The company fell short of its own estimates of subscriber addition. During the previous quarter, Netflix had stated that it expects to add 5.2 million customers in the first quarter. This includes 1.5 million domestic subscribers and 3.7 million international clients.
Netflix also missed the overall subscriber estimates of FactSet. While analysts expected the total number of subscribers to be 98.93 million at the end of the first-quarter, Netflix reported a subscriber base of 98.75 million. Investors’ disappointment over subscriber additions has triggered the selloff.
Apart from missing subscriber addition estimates, the company also reported another quarter of negative free cash flow. Netflix stated that negative free cash flow widened to $423 million, from $261 million in the same period last year. Netflix anticipates a negative free cash flow of $2 billion in fiscal 2017. The streaming content obligations of the company have also escalated to $15.3 billion, from $12.3 billion in the prior year’s similar quarter.
The company also issued a poor second-quarter earnings outlook. For the current quarter, Netflix expects earnings of $0.15 per share on revenues of $2.76 billion. This compares with the Thomson Reuters consensus estimate of $0.24 per share on revenues of $2.76 billion. Netflix anticipates adding 3.2 million subscribers in the current quarter, compared with analysts’ estimates of 2.45 million. Thus, considering the poor subscriber addition and earnings outlook, we forecast a decline in the stock of Netflix, fundamentally.
The stock of Netflix faces failed to consolidate after crossing the resistance at 145 levels (R1). The stochastic indicator has inched downwards after staying in the bullish region since December 2016. Thus, we can expect the stock to decline to the next major support level of 131. The decline would also enable the stock to cover the price gap between 133.73 and 138 created in January.
The analysis can be used to generate returns from the binary market by investing in a low or below contract. The validity of the put option or its equivalent should be one week. To increase the probability of success, the trade should be taken when Netflix trades near $145 in the equity market.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
