Netflix (ticker: NFLX) stock surged in after-hours trading on Monday following its second-quarter earnings report after the bell. While earnings per share missed by a penny, NFLX posted three major beats, exceeding analyst expectations on revenue, subscriber growth and third-quarter guidance.
Netflix stock was up more than 8 percent in afternoon trading, hitting all-time highs at more than $176 per share.
Earnings per share came in at 15 cents, up 67 percent from the 9 cents per share the company made a year ago, and a penny shy of the 16 cents per share analysts expected.
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Revenue, however, clocked in at $2.785 billion, an increase of 32.3 percent from the same quarter last year. Analysts were calling for Netflix to report revenue of $2.76 billion.
Netflix also issued guidance for the third quarter, during which they expect to churn out EPS of 32 cents on revenue of $2.97 billion, both major beats. Analysts had been expecting the company to earn 23 cents per share on revenue of $2.87 billion in the third quarter.
Going into Monday’s close, NFLX stock was up a remarkable 30 percent year-to-date; the Standard & Poor’s 500 index, for its part, was up about 10 percent for the 2017 calendar year. It looks like Netflix shares are certain to see that bullish trend continue, at least for now.
The second quarter saw new seasons of “House of Cards” and “Unbreakable Kimmy Schmidt” come out, and along with series like “13 Reasons Why,” which was released on March 31, that content helped create subscriber growth of 5.2 million — exceeding FactSet estimates by a full 1.97 million. Membership soared from 99 million to 104 million, crossing the 100 million mark for the first time.
While beats on revenue and guidance are great, subscriber growth is really what NFLX investors are paying attention to.
Subscriber growth and investment. Of those 5.2 million new members, 1.1 million came from the U.S., while 4.1 million came from international markets. Overseas growth is where the majority of net subscriber additions will come from in the future, as the domestic market continues to saturate.
At the moment, international markets are not profitable. The international segment posted a loss of $13 million in the second quarter on revenue of $1.165 billion. Last quarter, NFLX predicted it would lose $28 million on $1.14 billion of revenue internationally in the second quarter, so despite those small losses, there’s a reason markets were happy. And, as the letter to shareholders emphasized in bold, the international segment is expected to break into the black for the first time for the full fiscal 2017 year.
“The more noticeable news is that the overall quarterly profits have grown more than twice the rate of revenue,” says K C Ma, professor of finance at Stetson University. “This couldn’t come at a more opportune moment, in light of the rising operating cost of producing local original content for international markets.
“This also reflects Netflix’s superior pricing power over fierce competition from Amazon.com ( AMZN), Hulu, YouTube Red, and Time Warner’s ( TWX) HBO,” Ma says.
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That said, as longtime Netflix stock owners know, this business is about spending money to make money, and Netflix has never been afraid of spending. As evidenced by its 91 Emmy nominations — almost double last year’s number — the company’s investments are translating to quality programming.
Most of the big bucks going forward will be spent on creating original content, with the company expected to spend $6 billion on content in 2017. Eventually, it aims to have a full 50 percent of its library be original content.
And while Netflix has become a nearly ubiquitous activity for many Americans, some market observers think the company’s services can become an even more entrenched part of people’s daily lives.
“Netflix will continue to grow hours per user via innovations like downloadable content, which enables viewing without Wi-Fi and data plans,” says Eddie Yoon, the founder of EddieWouldGrow, a think tank and growth advisory firm.
Concerns. Competition and valuation have been common investor concerns in the past, and are likely to remain concerns going into the future. As Ma mentioned, the streaming space is getting crowded, and Amazon alone is also dumping billions into its content factory this year in an effort to fight Netflix for subscribers and screen time.
As for valuation, NFLX stock has long traded at defiantly elevated multiples from a fundamental perspective, and even at the close of trading on Wednesday it traded for 207 times earnings. Such is the value of a company Netflix’s size that’s able to consistently grow the top line by well over 20 percent annually.
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But as time goes on and that revenue growth inevitably begins to come back down to earth, the streaming giant will have to crank up the profits even more rapidly — or else likely suffer the wrath of the market. Today, as NFLX stock passes 100 million subscribers and notches new all-time highs, that’s not really a concern.
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Netflix (NFLX) Stock Soars on Phenomenal Q2 Earnings Blowout originally appeared on usnews.com
