Netflix’s Streaming Business To Remain Strong In Q2

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Netflix (NASDAQ: NFLX) is scheduled to announce its second quarter results on Monday, July 16. The company reported solid first quarter results, as both its revenue and earnings per share came in ahead of market expectations. The company’s revenue grew a robust 40% year-over-year (y-o-y) to $3.7 billion. This was driven by strong growth in subscribers across both the U.S. and international streaming markets. The international subscriber base increased at a rapid pace (42% y-o-y) once again, while domestic subscriber base growth stabilized in the low double digits. The company’s solid international growth has come despite stiff competition from the likes of Amazon and Hulu, as well as local content providers in various markets.

In Q2, we expect Netflix to report growth in revenues and subscribers across both the domestic and international markets. We expect the company to report revenues of around $3.9 billion, based on strong adoption in international markets. Furthermore, we anticipate that the total subscriber base for both international and U.S. streaming services could grow to over 130 million during the quarter. We have created an interactive dashboard that illustrates our expectation for Netflix’s Q2 results. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation.

We have a $362 price estimate for Netflix, which is slightly below the current market price. The company’s stock is up by around 100% year-to-date.

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Streaming Forecasts In Q2

In Q2, Netflix expects 6.2 million global net additions (1.2 million in the U.S. and 5 million for the international segment) compared to 5.2 million in the year-ago quarter, which is actually fairly conservative given the pace of additions in the international streaming businesses. The company also expects its operating margin to be around 12% in Q2.

We forecast Netflix to reach 58 million subscribers in the U.S. with an average monthly fee per subscriber of $10.80, translating into $1.9 billion in domestic streaming revenues for Q2. In addition, we also estimate close to 74 million subscribers in international markets with an average monthly fee per subscriber of $8.80, also translating into about $1.9 billion in international streaming revenues in the same period. Netflix has been growing its subscribers by leveraging its original content slate, and we expect this trend to continue in the near term as well. On the other hand, Netflix’s DVD business is expected to continue to lose steam, and its revenues will likely decline to just over $90 million.

 

Netflix saw its stock gain nearly 50% in 2017, and is already up around 100% year-to-date. The company should continue to benefit from its strong foothold in the streaming business as well as a robust lineup of TV shows and films in 2018. The company has a long-term goal of ensuring that nearly 50% of the content streamed on its platform is original. As a result, it is spending a significant portion of its content budget on original shows. The company plans to spend as much as $8 billion on shows and movies in 2018, up from $6 billion earmarked for content in 2017, which should drive subscriber growth but will weigh on margins.

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