Netflix Inc. (NFLX, Financial) delivered yet another home run in the most recent quarter, which resulted in a 9% spike in the company’s stock price after it announced another impressive quarter of subscriber growth and beat expectations.
The company’s revenue topped $11 billion in 2017 and, based on first-quarter results, it should continue to grow this year. Netflix posted revenue of $3.7 billion for the first quarter, a trajectory that sets it on course to top $15 billion this year.
This was boosted by unexpected growth in the number of subscribers, with net additions for the quarter topping 7.4 million worldwide, a massive improvement from 4.95 million in the same period last year.
Subscriber growth also crushed analysts' estimates of 6.6 million subscribers. The company now has 125 million subscribers, 95% of whom are paying members. The remaining 5% is made up of the 30-day free trial members, among other offers. The streaming service provider’s top line has been growing steadily over the last three years. This is expected to continue in tandem with subscriber growth.
Netflix’s net income, however, failed to match its top-line growth as the company continues to invest heavily in content production. Its subscriber-based revenue generation model means its top line is only affected by two things: the net subscriber growth and the average revenue per subscriber.
Currently, the company generates an average of $9 per every international subscriber per month while the North American rate is pegged at $10.99. With most of its subscribers being in the U.S., its average monthly revenue per subscriber is north of $10. As a result, it is correct to say that, based on average revenue per user, things are looking good.
When we look at the subscriber growth from the most recent results, as highlighted earlier, it shows the boat is riding the tide as the company continues to increase its global presence.
Its net income, on the other hand, relies on operating profit margins. The company has been spending heavily on content, which is expected to continue through 2020. The company spent roughly $6 billion on content last year and has indicated it will spend between $7 billion and $8 billion in 2018. This will likely hurt its profitability margins further, thereby preventing gains made on the top line from trickling down to significantly boost the bottom line.
This explains why, despite having impressive subscriber growth, its bottom line has remained flat. This also explains why the price-earnings ratio is beginning to mirror the trajectory of the company’s stock price as there is slight change being made in terms of earnings per share.
Netflix’s stock price trajectory has recently been characterized by a series of higher highs and higher lows, with significant dips and rebounds after a few weeks of rallying. Its most recent dip began on March 28 and ended April 2. After posting earnings on Monday, the stock has once again rebounded.Â
From a technical perspective, it could be a reasonable time to take some profits and perhaps wait for the next dip to add more to your current holding. Several analysts, including Stifel and Bank of America Merrill Lynch, have a hold rating with a target price of $325 to $350.
At the current price of $338, the stock appears to be at peak position within the targeted price range, but the market sentiment could change. Nonetheless, the long-term outlook remains positive with the substantial investments in content and continued subscriber growth expected to begin paying off in the next few years.
Conclusion
Netflix's disruption of the video streaming industry is comparable to Amazon.com Inc.'s (AMZN, Financial) disruption of the retail space. Amazon has grown to become the second-largest publicly listed company and now has Apple Inc. (AAPL, Financial) in its sight. If Netflix’s disruption of the film industry follows the same path, then it would be correct to say the company has a lot of room to run before reaching peak levels.
Disclosure: I have no positions in any stocks mentioned in this article.
