Should You Continue Streaming Netflix?

Netflix (NFLX) recently announced third quarter ended September 30, 2015 total revenue of $1.74 billion, up 23.4 percent year-over-year from $1.41 billion in the third quarter of 2014 and an increase of 6 percent sequentially from $1.64 billion in the second quarter of 2015. However, Wedbush Equity Research analysts forecasted third quarter revenue of $1.77 billion. Netflix has also provided revenue guidance for fourth quarter of 2015 and estimates consolidated streaming revenue to be about $1.67 billion.

Netflix declared third quarter of 2015 net income of $29.4 million or $0.07 of diluted earnings per share, down 50.4 percent year-over-year from $59.3 million or $0.14 of diluted earnings per share during the same period last year but, an increase of 11.8 percent sequentially from $26.3 million or $0.06 of diluted earnings per share in the second quarter of 2015.
The company forecasts fourth quarter of 2015 net income to be nearly $10 million or $0.02 per share.

The global content streaming company reported continued sequential and year-over-year improvement in its top line primarily due to successful expansion of the company’s operations internationally.

Impressive expansion

Netflix has expanded to more than 69 million subscribers across the globe and estimates to conclude the current year with more than 74 million subscribers. This solid estimate for continued growth in subscriber base is fueled by notable company’s growth efforts including, strategic introduction of services in Portugal, Italy, Spain and Japan.

The online streaming company has added nearly 6 million total subscribers since last four years in the US and is quite confident about this subscriber growth to continue as on-demand content viewing experience is believed to be better than the usual linear, and the complete market is expected to shift from the traditional linear viewing experience to the latest on-demand internet television viewing experience in the forthcoming 10 to 20 years. Moving ahead, Netflix expects to launch the latest Disney pay-one deal in the US during the third quarter of next year.

Netflix seems extremely positive about the growth prospects of internet TV in the US and globally, encouraged by the accelerated adoption of the latest TV viewing experience. Therefore, the company has further extended its target for adding new subscribers to its already strong base of internet TV viewers.

Netflix strategically added 0.88 million fresh US subscribers during the quarter as against 0.98 million last year with an estimate of 1.15 million. The company’s subscriber addition target for the quarter in the US exceeded the forecast primarily due to greater-than-estimated involuntary churn that is somewhat attributable to the continuing shift towards chip-based debit and credit cards.

Although, a majority of the investment analysts have a favorable growth outlook for Netflix but, at present the stock is highly overvalued and seems out-of-reach for a majority of key investors. Still, the internet TV provider is successfully growing its base for new subscribers and appears an attractive investment option.


A majority of the key investment analysts are extremely positive about the growth prospects of Netflix and thus, suggests a “Buy” rating on the stock primarily driven by superior company execution on its significant growth opportunities.

Overall, the investors are advised to purchase equity in Netflix, Inc. looking at the company’s strong balance sheet with significant total cash of $2.61 billion against weaker total debt position of $2.40 billion only, encouraging Netflix to make future growth investments and thus, benefiting the key stakeholders. The profit margin of 2.53% is nominal. However, the stock is extremely overvalued with trailing P/E and forward P/E ratios of 326.89 and 472.73 respectively compared to solid industry’s average P/E of 20.84. The PEG ratio of 25.08 also indicates expensive company growth compared to an attractive industry’s growth average of 6.71.
Published on Dec 14, 2015
By Yaggyaseni Mittra

Copyrighted 2020. Content published with author's permission.

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