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Netflix Jumps After Earnings But Has A Winding Road Ahead

Daniel Laboe

The streaming pioneer and secure leader of the space may not maintain that security for long. Netflix NFLX has had a rocky year with more extensive deceleration than expected in subscription growth, before the next wave of competition entering the market.  After its dismal Q2 earnings, NFLX shares dropped to their lowest levels since 2018. Shares rallied 15% off its lows in September into the Q3 earnings report, which was released after the bell tomorrow.

Q3 Results  

Earnings results hit the after-hours markets hard with an immediate 5% drop followed by a price surge 2 minutes later that sent the stock up over 10% from the closing price. The earnings were mixed significantly beating EPS estimates, but marginally missing on revenue targets.

The metric that is typically most important for NFLX is its subscription growth. Netflix marginal missed total subscription growth estimates, which would have cued me to think adverse price action, get short. But the complete opposite occurred as investors and traders bought this stock up in the after-hours market.

Looking more closely into the numbers, I found that international subscription growth beat estimates, and as the primary future growth driver, I believe that this metric is the most important. It appears that domestic subscription growth has plateaued, and the global market still has a substantial amount of expansion ahead.

I think that investors and traders were looking for any positive news to jump into this stock, and an international growth beat, as well as a massive EPS beat, was enough to set off that hair-trigger. As the reality of the actual earnings results set in the stock traded down and closed today with only an only 2.5% gain.

New Competition

Apple TV+ AAPL and Disney+ DIS are two highly anticipated streaming platforms that are going to shake up the space next month. Specifically Disney, with its massive library of content that they have been accumulating for years and the firm's savvy acquisitions that have all been leading up this digital streaming product.

Over the past 15 years, Disney has made 4 vital purchases that have positioned them to be the ostensible original content king. The acquisitions were Pixar, Marvel, LucasFilms, and its most recent purchase of 21st Century Fox, all of which are bringing in the highest quality content that will make Disney+ a "must-have" subscription service.

International growth is a growing concern for Netflix, and Disney+ will only accentuate that anxiety. Disney releases its films worldwide, and the brand is known globally through its box office hits and theme parks around the world. I think that Disney+ could significantly hamper Netflix's international growth.

Netflix is going to have to continue pouring significant amounts of money into its original content if it wants to remain competitive in the space. It is currently burning $2-3 billion annually in free cash flow and will likely have to continue doing this if not up the ante.

Take Away

Netflix has been one of the most compelling growth narratives for over 5 years now, but I think that run may be coming to an end as the streaming space begins the saturate and big media giants like Disney step into the ring. I would stay away from Netflix for now as its prolific growth rate begins to be priced out. Q4 earnings will be very telling as to how NFLX will fare as competition ramps up.

 

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