As Netflix Keeps Beating Expectations, Its Competitive Edge Gets Bigger and Bigger

 thestreet.com  7/18/2017 1:17:55 AM   Eric Jhonsa

By trouncing quarterly subscriber estimates and issuing decent guidance, Netflix Inc.  (NFLX) did much to put to rest fears that its stock had gotten ahead of itself following a 31% rise so far in 2017. The streaming giant may have also shown that it has reached a point where its sheer scale provides a competitive edge that makes it hard for even deep-pocketed tech and media rivals to slow it down.

Netflix reported Q2 revenue of $2.79 billion (up 32% annually) and GAAP EPS of $0.15. Revenue was slightly above a $2.76 billion consensus; EPS slightly missed a $0.16 consensus due to heavy spending, but was in-line with guidance.

Importantly, Netflix reported 1.07 million U.S. streaming subscriber net adds and 4.14 million international net adds, respectively blowing away guidance for 600,000 and 2.6 million net adds. With U.S. subs standing at 51.92 million and international subs at 52 million at quarter's end, a majority of Netflix's streaming users reside outside the U.S. for the first time.

Q3 subscriber guidance was also solid, if unspectacular: Netflix expects to add 750,000 U.S. streaming subs and 3.65 million international subs, above consensus analyst estimates of 725,000 and 3.2 million. Revenue guidance of $2.97 billion (30% annual growth) and EPS guidance of $0.32 are above consensus estimates of $2.88 billion and $0.23.

Shares are up 8.9% in after-hours trading to $176.06 as of the time of this article, blowing past a June high of $166.87 along the way. Among U.S. media giants, Netflix's $79 billion market cap is now only surpassed by Walt Disney Co.'s   (DIS)  $165 billion; Time Warner Inc. (TWX) , due to be acquired by AT&T, has a $77 billion market for the moment.

Not too surprisingly, Netflix, which just received 91 Emmy nominations for 27 original shows, chalks up its strong Q2 subscriber adds to the popularity of its original content slate. 14 new seasons were launched for original shows in Q2, including Season 5 of House of Cards and Orange is the New Black. Netflix also launched 9 original movies, including Adam Sandler's Sandy Wexler and Brad Pitt's War Machine, to go with 13 comedy specials and 8 documentaries.

Management expresses confidence this momentum will continue in Q3 - it will see the debut seasons of shows such as Castlevania and Marvel's The Defenders, as well as Season 3 of Narcos. But it cautions it thinks some subscriber adds were "pulled forward" into Q2, and that it wants to guide conservatively due to past forecasting errors.

Earnings call commentary was as upbeat as ever. CEO Reed Hastings noted average viewing time per subscriber continues to rise, and once more downplayed the notion of a direct rivalry with Amazon.com Inc.'s  (AMZN) Prime Video, insisting there's room for plenty of firms to succeed as what he deems "Internet TV" catches on around the world. He also mentioned Netflix sees TV service bundles as another way to grow its base, noting that some early European efforts in this area have been successful.

Hastings and other execs pointed out that popular foreign content, such as Korean film Okja and Spanish drama Las Chicas del Cable, fared well both in their home markets and elsewhere. Okja is said to have made many Korean consumers aware of Netflix for the first time, while Las Chicas del Cable is said to have "attracted significant viewership in the US and throughout the entire Spanish-speaking world."

Reading between the lines, management's remarks suggest Europe and Latin America remain larger contributors to Netflix's eye-popping international growth than Asia, even though the company's services are now present in every big Asian market save for China. Hastings admitted Netflix has "a lot more to learn" about appealing to Asian audiences, and content chief Ted Sarandos indicated Netflix will invest more on the ground in the region.

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