Netflix (NFLX) Gives Up Gains as Domestic Slowdown, Cash Needs Overshadow Booming International Growth
After trading up nearly 10% after-hours on its earnings beat, Netflix (NASDAQ: NFLX) has done a complete 360 and is now down 6.8%. Downside comes amid general market malaise and as investors weigh slowing growth in the U.S. versus booming International growth.
Netflix reported Q4 EPS of $0.10, versus the analyst estimate of $0.02. Revenue was $1.82 billion, versus $1.83 billion expected. The company said domestic subscribers grew 1.56 million, which was below the consensus estimates of 1.62 million and guidance of 1.65 million. International was a different story with the company adding 4.04 million, versus the consensus and guidance of 3.5 million.
Netflix guided to 1.75 million domestic streaming net adds in Q1 and 4.35 million international streaming net adds.
The results in the U.S. suggests domestic growth will be much harder to come by going forward given the already high penetration among U.S. households. The U.S. results could also suggest competition from Amazon Prime, Hulu and others is starting to weigh. FBR Capital analyst Barton Crockett noted that for four years, Netflix has grown subs domestically in the 5.5 million to 6.3 million per-year pace. In 2016, however, this seems to be trending closer to 4 million.
International is a completely different ball game. Sterne Agee CRT analyst Arvind Bhatia sees strong international growth ahead. He estimates total international new subscribers of 17.4 million in 2016. By 2020, they see the international subscriber base reaching 96 million.
Overall subscriber trends are robust. The company ended 2015 with about 75 million streaming subscriber, this is up 30% year-over-year - a 15% increase in the US and over 60% internationally.
Netflix continues to increase its focus on original programming. The company said it will have 600 hours of original programming in 2016, up from 450 hours in 2015. The Disney deal will also kick in in late 2016, which could attract new and lapsed subscribers.
The new content, however, does not come without a cost. FBR's Crockett noted that Netflix is incurring cash flow–negative up-front financing, which drove a free cash flow loss of $900 million in 2015 which could move to over $1 billion in 2016. This, according to the analyst, suggests Netflix could need to add another $1 billion of debt to its $2.4 billion gross total to keep cash at its target of $1 billion.