Netflix Viewers Watch a Billion Hours of Content in June – and Investors Await a Positive Earnings Surprise
Netflix’s marketing efforts pay off, big time, and analysts are raising their earnings estimates.
Ever since it alienated its customers by boosting its charges and launching a doomed plan to get them to sign up to two separate video rental services (one streaming, one DVD-by-mail), Netflix Inc. (NFLX.O) has been battling to woo them back. At last, it seems, the company has met with some success, judging by a Facebook status update from CEO Reed Hastings, congratulating his team on streaming more than a billion hours of video content to subscribers in June alone. The stock soared to close more than 13% higher over the previous day’s level – and went on to tack a little more on Friday, despite the slump in most major market indexes.
Even before that casual comment by Hastings, Netflix’s fundamentals were looking stronger and the company appeared very likely to handily beat analysts’ estimates when it reports its second-quarter results in less than three weeks’ time. While analysts predict the company will announce its profits will hit 5 cents a share for the quarter, the StarMine SmartEstimate, a proprietary model that places the greatest weight on the most recent forecasts by those analysts with the most impressive track records for accuracy, is indicating that actual earnings could be closer to 7 cents a share. Even before the Hastings comments, StarMine had calculated that Netflix had a large Predicted Surprise – the difference between that consensus forecast and the SmartEstimate, which tells us how likely it is that a company will either beat or fall short of expectations. Today, Netflix has a remarkably high Predicted Surprise of more than 21%, meaning there is a significant probability either that many analysts will raise their estimates still further or that Netflix will deliver a healthy positive earnings surprise when it announces its results July 24.
In the conference call with analysts and investors following the release of Netflix’s first-quarter results, Hastings predicted that the company would add 7 million new (or returning) subscribers by the end of the year. In the wake of that comment, analysts began to raise their estimates for Netflix’s earnings, shifting from forecasting of a loss of as much as 15 cents for the second quarter to calling for it to report a profit. The most recent comments by Hastings already have boosted the stock price, which had plunged from its highs of $300 a share last year to $50, and now trades at around $80. Netflix records a score of 97 on the Analyst Revisions Model (ARM), a proprietary measure of changes in analyst sentiment and a leading indicator of future revisions, signaling that analysts are more likely to raise their estimates for Netflix than they are for the vast majority of the company’s peers.
It is fortunate for Netflix that its marketing campaign seems to be bearing fruit, given that the company has recorded its highest SG&A spending level ever, of $165 million in the first quarter of 2012. Perhaps the weaker global economy may be a blessing in disguise for Netflix; potential moviegoers are more likely to stay home and watch last summer’s blockbusters streamed onto their flat screen televisions than they are to fork out the money required to head out to a theater and pay for admissions tickets, popcorn and beverages. In the conference call with analysts and investors following the release of Netflix’s first-quarter results, Hastings had said he expects the company to add seven million new subscribers by the end of the year.
That’s not to say that Netflix isn’t feeling some pain from the global economic storm. Its international operations are still losing money, for instance. But the European sovereign debt crisis and the economic headwinds elsewhere also make this a good time for the company to deploy its profits from domestic operations to fuel international expansion; this may prove to be the best (or at least, the least expensive) entry point into many markets for Netflix.
There are still some warning signals for investors. Even at its current levels, the stock seems pricey, trading at a forward 12-month price/earnings ratio of 72 and earning only the lowest possible score of 1 on StarMine’s Intrinsic Valuation model, a relative ranking of all companies in a region based on their intrinsic value. Now that it appears to be winning back the affections of subscribers and attracting new viewers, Netflix still has to do battle on another front: content costs. Verizon’s (VZ.N) pending link with Coinstar (CSTR.O), under the terms of which the latter will provide streaming content to Verizon subscribers, may become reality by the end of 2012. While that will provide Netflix with a new source of competition, the presence of another major content provider may help drive costs lower.
For the time being, at least, Netflix investors may finally have cause to celebrate, as the aggressive marketing campaign to convince consumers that give the company’s streaming another chance is paying off. It seems as if the company is on track to report a healthy positive earnings surprise for the just-completed first quarter. The release of original content late in the third quarter may give viewer figures another boost – or at least, that’s what Netflix’s CEO is predicting. “When ‘House of Cards’ and ‘Arrested Development’ debut, we’ll blow these records away,” Hastings posted on Facebook, referring to the June billion-hour landmark.
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