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What's Next for Netflix Stock After Q3 Earnings as Apple & Disney Launch?

Benjamin Rains

Wall Street seemed to reward Netflix NFLX when it beat Q3 earnings estimates after the closing bell Wednesday. But the streaming TV power’s post-release positivity was short lived as NFLX stock fell Thursday and slipped another 6% Friday.

Netflix stock is down 24% in the last six months and its third-quarter 2019 subscriber miss might send off warning bells that could see investors move on as tech giants and entertainment conglomerates, from Apple AAPL to Disney DIS, prepare to enter the fray.

Still Binge Worthy?

Netflix crushed our Zacks earnings estimate and roughly matched our revenue projection. Adjusted earnings soared over 65% form Q3 2018 and sales surged 31% to $5.25 billion. Yet these numbers didn’t seem to matter to investors, and why should they after Netflix fell short of its own subscriber growth figures for the second quarter in a row.

Netflix’s recent miss was far less egregious than Q2, when it added only 2.7 million paid memberships when it called for 5 million. This might have made its small miss, 6.8 million vs. management’s 7.0 million projection, easier for Wall Street to swallow. But context matters. The last time three times Netflix fell short of its own quarterly subscriber growth estimates, it topped its quarterly forecast the next period by roughly 1 million.  

The streaming TV firm still ended the period with 158.33 million paid subscribers around the world and management pointed out that its Q3 guidance forecast was its “most accurate in recent history.” However, that sentiment hardly matters to investors when the company added 0.5 million paid net users in the U.S. when it called for 0.8 million. This came after the Los Gatos, California-based company posted its first quarter-to-quarter subscriber decline in the U.S. since 2011 in Q2.

 

 

 

 

Competition

Netflix is still by far the largest streaming TV company in the world and expects to add 7.6 million new users in the fourth quarter to close 2019 with 165.93 million paid subscribers. Its closest rival in terms of raw size is Amazon AMZN Prime, which reportedly claims over 100 million users, though it is not clear how many people use the free Prime Video service. Meanwhile, Hulu (now controlled by Disney) last reported 28 million users.

Disney+ will debut on November 12 at $6.99 per month and grant users access to old and new content from its name shake brand, Pixar, Marvel, Star Wars, National Geographic, and more, bolstered by its Fox deal. Disney is also likely to bundle some type of offering to include Hulu, ESPN+, and its new stand-alone streaming offering.

Meanwhile, Apple TV+ is set to launch on November 1 for $4.99 per month. The iPhone giant’s small initial slate is set to grow slowly, with A-list Hollywood stars both in front of and behind the camera.

As it stands, Netflix’s premium plan costs $15.99, while HBO Go runs T $14.99, and Amazon Prime costs $12.99—which comes with shopping and shipping perks. Comcast CMCSA is also set to introduce a streaming service under its NBCUniversal division in 2020.

Outlook

Overall, Netflix expects to add 26.7 million users in 2019 after in pulled in 28.6 million in 2018. That might sound good on its face, but company executives previously projected that 2019 paid net adds would be up year over year. “Our current forecast reflects several factors including less precision in our ability to forecast the impact of our Q4 content slate, which consists of several new big IP launches (as opposed to returning seasons), the minor elevated churn in response to some price changes, and new forthcoming competition,” the company wrote in prepared remarks.

 

 

 

 

Netflix executives noted that its long-term business outlook remains unchanged. Nonetheless, Wall Street appears to be worried.

The streaming TV company will see three of its most-watched shows—The Office, Friends, and Parks and Recreation—all leave its crowded U.S. library over the next few years for soon-to-be-rival platforms. It is important to note that The Office is Netflix’s No. 1 show, while library programming accounted for 72% of total viewing minutes last year, according to Nielsen data.

This is why Netflix recently landed the streaming rights for Seinfeld, for a figure that is said to be over $500 million and has spent billions of dollars on its own original programming for years. Going forward, the company will have to pour even more money into its own content, which will also have to be more compelling in a space with more options than ever.  

Along with lower-than-projected user growth, Netflix projects it will have a negative cash flow of –$3.5 billion in fiscal 2019. And Netflix’s near-term plan is to “continue to use the high yield market in the interim to finance our investment needs.”

Top & Bottom Lines

Looking ahead, our Zacks Consensus Estimates call for Netflix’s full-year fiscal 2019 revenue to pop roughly 28%, with 2020 expected to come in 22% above our FY19 estimate. These would both represent far slower expansions than 2018’s 35%, 2017’s 32.4%, and 2016’s 30.3%.

At the bottom end of the income statement, NFLX’s adjusted fiscal 2019 earnings are expected to climb 20.9%, with fiscal 2020 projected to come in 71% higher. Despite Netflix’s positive earnings outlook, its estimates have fallen since it reported its Q3 results.

 

 

 

 

Bottom Line

Netflix is currently a Zack Rank #3 (Hold) that holds “F” grades for Value and Momentum and a “D” for Growth in our Style Scores system. NFLX stock closed regular trading Friday down -6.15% to $275.30 per share on the back of far larger than average trading volume. This represented a 29% downturn from NFLX’s 52-week highs.

In the end, Netflix is still one of the only pure-play streaming TV investments on the market, aside from Roku ROKU. But it seems like now might be time to stay away from Netflix. Interested investors should probably wait for a sign of a comeback, as NFLX stock could continue to fall further below its 50-day and 200-day moving averages.

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