By Daniel Gordon
Video streaming website Netflix, Inc. (NASDAQ: NFLX) is slated to announce its second quarter 2015 earnings results on Wednesday, July 15, 2015 after market close. Analysts expect the company to post earnings of $0.31 per share on $1.65 billion in revenue, down from $1.15 earnings per share and up from $1.34 billion in revenue from the same quarter a year prior.
Netflix’s $1.65 billion in expected revenue consists of: $1.02 billion in domestic streaming revenue, $457 million in international market revenue, and $164 million in revenue from the company’s domestic DVD division. As a result of their substantial revenue gains, Netflix shares have nearly doubled, up 95% over the course of the last year.
Netflix, which was originally formed as a DVD-by mail rental service, has now transformed into a digital streaming giant surpassing 62 million subscribers worldwide. Along with its streaming of movies and TV shows, Netflix has also entered the production market by creating, directing, and streaming original programming such as the popular political drama House of Cards. This new method of relaying media content to consumers has enabled Netflix to remain competitive against other companies in the market and has allowed Netflix to generate more revenue.
As a result of the company’s increasing revenue, Netflix’s stock price has substantially risen, last closing at $680.60 per share, close to its 52-week high of $706.24. Reflecting the increasing cost of the company’s stock, Netflix made an announcement that it will be splitting its shares seven-to-one effective July 14, 2015. The new shares will be available on the market a day later on July 15, 2015. Current stockholders will not be impacted by the share splitting, as the total value of their stock portfolio will remain the unchanged. However, for new stock purchases, the price will be one seventh of the price, thus enabling a larger pool of investments in the company.
On July 10, 2015, Morgan Stanley analyst Benjamin Swinburne weighed in on Netflix ahead of the company’s Q2 earnings, maintaining a Buy rating and raising his price target from $620 to $750. Explaining the increased price target, the analyst noted: “Netflix is currently seeing higher time spent per day than any single broadcast network. In addition, we believe US paid subs are spending $0.13 per hour viewed (down from $0.21 in 2013 and vs. $0.35 for pay-TV). Our outlook for Netflix monthly pricing to reach ~$14 by 2025 is potentially still conservative and essentially holds the user’s cost per hour viewed at $0.13 long term, with usage growing from ~2hrs a day today to ~3.5hrs in ’25 – a 6% CAGR and also potentially conservative given NFLX’s content investments (also below HBO Now’s current price point).”
When measured over a one-year horizon and no benchmark, Benjamin Swinburne has a 69% overall success rate recommending stocks and a +11.6% average return per recommendation. Swinburne has rated Netflix seven times, earning an 86% success rate recommending the company and a +38.7% average return per NFLX recommendation.
On July 10, 2015, Stifel Nicolaus analyst Scott Devitt similarly maintained a Buy rating on Netflix with a $725 price target. The analyst said his firm’s current model forecasts Netflix having “150 million streaming subscribers and $3.8 billion in operating income by year-end 2020.” The analyst believes that, “[Netflix] could generate about $5.4 billion in operating income, which could make it a $100 billion company and nearly a $1,600 stock.”
When measured over a one-year horizon and no benchmark, Scott Devitt has a 62% overall success rate recommending stocks and a +17.2% average return per recommendation. Devitt has rated Netflix 25 times, earning an 81% success rate recommending the company and a +73.7% average return per NFLX recommendation.
Unlike Swinburne and Devitt, Wedbush analyst Michael Pachter maintained an Underperform rating on Netflix stock with a $40 price target. Pachter explained his bearish rating, stating: “I just have a problem fundamentally valuing the company, because once [Netflix] raise[s] [its] price and once they do start making a ton of money, the question is will they attract competition at lower prices and will they seize growing?” The analyst thinks that Netflix will raise its subscription price to $15 a month over the next five years and reach “60 or 70 or 80 million subscribers and then they won’t grow and they will be solely profitable with no growth, which means you will pay much more modest multiple than a 126 times.”
When measured over a one-year horizon and no benchmark, Michael Pachter has a 46% overall success rate recommending stocks and a +0.0% average return per recommendation. Pachter has rated Netflix 40 times, earning a 15% success rate recommending the company and a -49.6% average loss per NFLX recommendation.
Out of 31 analysts polled by TipRanks, 20 are bullish on Netflix, 2 are bearish, and 9 are neutral. On average, the top analyst consensus for Netflix on TipRanks is Moderate Buy.