* Reports Q4 2019 results on Tuesday, January 21, after market closure
* Income expectation: $ 5.45 billion
* EPS expectation: $ 0.52
When the streaming entertainment giant Netflix (NASDAQ 🙂 reports its 4Q later today, it must demonstrate that it continues to add paid subscribers fast enough to stay ahead of the competition.
The 25% increase in shares since their low point in September indicates that investors have already taken that outcome into account in their expectations. After analysts' second-quarter earnings estimates were missed, Netflix added 6.77 million subscribers in the third quarter, with stronger-than-expected growth abroad.
This helped alleviate investor concerns that growth peaks, as do several new players with deep pockets, such as Disney (NYSE 🙂 and Apple (NASDAQ 🙂 introduce their own streaming services.
Concerns about competition and the stagnating growth of Netflix in the home market are mainly behind the underperformance of the share in the past 12 months. The shares hardly grew during this period, while other megapap tech shares reached a record. Netflix closed on Friday at $ 339.67, a 20% drop from its record high in June 2018.
Netflix's weekly price chart
Today's income release is an important test for the shares, as this is the company's first report since the launch of the Disney + streaming service in November, which has connected millions of subscribers almost immediately. Comcast & # 39; s (NASDAQ 🙂 NBCUniversal unveiled its own streaming platform last week, while AT & T & # 39; s (NYSE 🙂 WarnerMedia is expected to launch its platform in May.
Growth versus spending
The biggest challenge for Netflix in this dynamic situation is to maintain a good balance between growth and spending. The company's huge content and marketing budget can only be justified if the company adds more subscribers. If that does not happen, the stock must reflect that reality, especially when Netflix borrows to boost growth. The company is expected to burn nearly $ 2.7 billion in cash this year.
Financing growth through debt is a risky model that makes shares of Netflix vulnerable. The Los Gatos, California-based company will continue to use the junk bond market to fund its programming costs, which are expected to be around $ 15 billion this year.
What if the growth in the number of subscribers in the most lucrative market continues to slow down and the company continues to burn more money each year to cover the costs of success? Recent price increases have helped Netflix grow its profits and revenue, but that strategy has its own risk, especially when consumers see more streaming options becoming available. After an increase in subscription costs last year, Netflix is ??expected to record the weakest growth in the US in years, with only 2.7 million customers in 2019.
These threats make Netflix a risky bet in 2020. Option traders predict a large fluctuation in stocks and predict a move of up to 7.7% after the company reports earnings today, according to data provider Trade Alert. That is more than the average move of 6% recorded after the last eight income releases.
Bottom Line
Emphasizing these risks does not mean that we do not like the shares. In our opinion, Netflix is ??a major success story that has completely reformed the media entertainment industry. We believe the company still has the potential to produce many more blowout quarters based on content, broad global appeal, and superior technology.
But with the upcoming competition, rising content costs and saturation in the domestic market, the way forward will not be that easy. In our opinion, Netflix will lag behind other mega-technology stocks until investors can see a clear sign that the company is holding up well and can defend its ground. Strong subscription growth in 2020 is crucial to achieving that result.
