Q2 Preview: Most Analysts Neutral on Netflix (NFLX) Into Results as Impact of Int'l Expansion Remains Unclear

July 24, 2012 12:40 PM EDT
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Price: $138.60 +0.14%

Rating Summary:
    33 Buy, 23 Hold, 9 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 30 | Down: 30 | New: 23
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Traders in Netflix (Nasdaq: NFLX) are buying the stock Tuesday as the market is positioning itself ahead of the company's second-quarter earnings report, due out after the market close this afternoon. Compared to the broader equities market, Netflix shares are outperforming nicely: the S&P 500 is trading down 1.3 percent while NFLX is up 1.3 percent to $80.95.

The Street is looking for Netflix to report quarterly earnings of 5 cents per share on sales of $888.9 million. The company reported a profit of $1.27 per share during the same quarter in 2011, and issued a loss of 8 cents per share during the first quarter of 2012.

Despite recent pressure in US stocks, Netflix shares are up more than 20 percent since the end of June. The stock is down almost 7 percent over the last three months, down 37 percent since a high set in early February, but up about 18 percent since the beginning of 2012.

Data from StreetInsider.com's Earnings History page for Netflix reveals some interesting points:
  • over the last four quarters, Netflix has beat the Street's earnings estimates by a whopping 35 percent, and
  • one week after the company reports, shares are, on average, down about 7 percent.
Our Ratings shows most analysts are remaining on the sidelines ahead of the results: eight sell-side firms have a Buy on the stock, 16 have a Neutral, and eight have a Sell rating.

Analyst Commentary:
  • JPMorgan - Expecting a strong quarter. Looking for some insight into the outlook for domestic streaming subscribers over the second half of this year.

    Modeling for domestic streaming subs of 24.05 million at the end of the quarter, total streaming subs at 28 million. Sees about 2.85 billion total viewing hours for all of the second quarter. JPMorgan's ending streaming sub forecast implies "Netflix usage per subscriber increased 20% in 2Q12 to 69 minutes/subscriber/day from 58 minutes in 4Q11..."

    The firm believes Netflix will reiterate its guidance fro about 7 million US streaming net additions over 2012 amid "positive seasonality benefits in 2H to drive higher gross adds." Sees net adds of 1.5 million in the third quarter and 2.2 million in the fourth quarter for total adds of 6.1 million over 2012. JPMorgan said, "We think Netflix’s 3Q guidance likely needs to show a sharp increase in the trajectory of domestic streaming net adds in order for investors to have confidence in the company’s ability to deliver 7M net adds in 2012."

    JPMorgan will also be looking for color into gross additions and churn, international traction in the UK and Latin America, an update on additional European markets by year end, an update on the Epix deal, and the profitability outlook given international expansion.

    Maintains Neutral and $87 target into results.

  • Wedbush - The firm sees inline quarterly results and subscribers to be at the high end of guidance.

    Wedbush said if the company returns to profitability this quarter, " it is unlikely to commit to sustained profitability as it remains committed to subs growth, expecting to launch an additional European market in Q4. If it does not return to profitability in Q2, however, Netflix will likely guide to profitability in Q3 to restore investor faith in its ability to turn a profit, despite falling ARPU and more
    competition from Coinstar’s Redbox..."

    The firm called Netflix's FY12 domestic streaming net additions outlook "unrealistic." "With 1.74 million domestic streaming net adds in Q1 and 0.79 million more in Q2 at the high end of guidance, Netflix must add . 4.5 million in 2H to hit its target. This implies a 35/65 split between 1H and 2H, but the split over the last 10 years is closer to 40/60, suggesting net domestic sub adds will come in closer to 6 million than to 7 million."

    Maintains Underperform and $45 price target.
Netflix usually reports its quarterly figures just a few minutes after the closing bell rings. Tune into our Earnings category to get a quick-and-easy analysis of the results within seconds of the company's official release.

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