* Reports Tuesday, April 16 after the close
* Revenue Expectation: $ 4.5B
* EPS: $ 0.57
Netflix Inc. (NASDAQ 🙂 has so far given investors no reason to complain about its performance. The shares have delivered an explosive return since trading began in 2002 and increased by around 30,000% in less than 20 years. Shareholders loved Netflix shares for one primary reason: the company continues to show impressive growth in the number of subscribers, the bottom-line number that most analysts and investors are focusing on.
In the last five years alone, Netflix's stock increased by more than 600%, while the streaming giant continued its growth momentum, more than 60 million subscribers in the US and 139 million worldwide conquered because of the strong content and technology that nobody could match.
Netflix monthly, 10 years
But this winning combination will face the first big challenge this year, while much larger and deeper rivals, including Disney (NYSE 🙂 and Apple (NASDAQ :), give video streaming a greater boost. This looming threat is one of the most urgent issues that Netflix must address when it makes a profit after today's market closure
Netflix has lost around $ 10 billion in market value since Disney presented details about its flagship streaming service, Disney +, on Thursday. While Disney reached a record high after the announcement, Netflix's stock remains under pressure. Shares fell 4.5% on Friday and continued to slide and lose 0.7% yesterday to close at $ 348.87.
Disney & # 39; s announcement of its reaction to the disruptive technology and rich content of Netflix, with plans to launch Disney + for a price of $ 7 per month, significantly lowers Netflix – the most popular US online streaming service subscription costs around $ 11 a month.
Two red flags for Netflix investors
The most problematic problem that Netflix faces in the midst of this attack of new streaming services is the protection of its home base, where growth is already high. Netflix expects to add 1.6 million new paying customers in the United States in the first quarter, less than the 2.3 million it added in the same period a year ago.
Until now, investors were willing to ignore that slowdown in growth when Netflix compensated for this by adding more subscribers worldwide. In today's profit release, chances are that Netflix will again produce a healthy quarter for its global growth, because that area has little competition to deal with.
But maintaining that competitive advantage may not be that easy, especially when Disney is armed with Fox content and some of its best titles, including & # 39; The Simpsons & # 39 ;, the Marvel and Star Wars franchises and National Geographic Channel content – is starting to attract subscribers' attention.
Another potential red flag is that Netflix pursues a risky growth model based on loans from credit markets to finance new programming and the marketing budget. While reporting its Q4 numbers, Netflix has announced that it expects to spend about $ 3 billion more in 2019 than it takes. This would make it the sixth consecutive year of burning money from the company.
Bottom Line
As we noted in previous articles, the risks for the strong ascent of Netflix are increasing and the recent performance of the stock clearly reflects that. Over the past six months, the upward trajectory of Netflix shares has stalled and it seems that the rich valuations of the company play a role here. Netflix is ​​valued at 47x estimated EBITDA compared to the average multiple for US media giants of 9x, according to Bloomberg data.
For cautious investors, this is the right time to make a profit and reduce positions. One way to play this transaction is to take an equal position in both Netflix and Disney shares and to hedge your bets. We think it will take a lot of pain and money for companies like Disney to chase away Netflix and prove that they are a substitute for its powerful platform. On the other hand, a small quarterly error at this stage would cause a much larger sell-out of Netflix shares.
