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Netflix After Earnings: Should Investors Get Down With It?

Video streaming company Netflix (symbol: NFLX) proved most sceptics wrong beating most third quarter (Q3) earnings-per-share (EPS) estimates. Also, Netflix reported much better international streaming additions of 3.2 million (versus own forecast of 2 million). This caused its shares to soar by much as 20% in afterhours trading. Is it all glitz and glamour again for Netflix?

Let’s start with the numbers: Netflix reported Q3 EPS of $0.12, well above analyst consensus of $0.0574 (see chart below). This caught most analysts by surprise (though a few were even more optimistic).

However, quarterly revenue came in roughly as expected at $2.29 billion, just like most analysts expected for a longer time already.

The streaming giant’s guidance of $0.13 EPS for Q4 is better than most analysts anticipated before going into the Q3 earnings, although some analysts are looking for EPS of $0.16.

Netflix expects streaming revenue to reach $2.34bn, compared to a consensus of $2.39bn for total revenue. Remember, Netflix still has a DVD-rental service, hence the distinction. This segment is not that big anymore though, since Q3 streaming revenue reached $2.16bn on a total of $2.29bn.

The EPS and revenue numbers and guidance are solid, but don’t justify a 20% jump. But the strong subscription addition numbers are certainly something to be ecstatic about.

Most sceptics doubted Netflix’ ability to expand globally. Although YouTube has over one billion (daily!) users, Netflix still has to reach 100 million subscribers and currently has 83 million users. The problem used to be international subscriptions. Earlier this year, the streaming giant finally gained global reach (except for China), but a lot of voices were heard that offerings in most countries were quite poor. Netflix seems to have this under control, as indicated by 3.2 million international additions in Q3 and a guidance of 3.75 million for Q4. It launched initiatives to be more user-friendly in its international offering (more non-english interfaces, payment options) which should spur subscriptions. That points to a bright global perspective for Netflix, even as Netflix struggles to get China on the map.

But also US subscriptions were better than expected. Instead of 300,000 additions, Netflix added 370,000 subscribers and sees 1.45 million users more for Q4. This significantly higher number is the result of a fading cancellation-effect (that was caused by the end of a ‘grandfathering’ price increase period). CEO Reed Hastings thinks Netflix can reach 60 to 90 million US-subscriptions, compared to 48 million now.

There are a decent number of streaming offerings that compete with Netflix. Take for instance Hulu, Amazon and YouTube (Red). But only the basic YouTube service has a global reach (Red is more US oriented), Hulu and Amazon are not available in most countries across the globe. In addition, no company offers a complete streaming package due to their own original programming. This is a key advantage for Netflix, that can boast over a wide range of quality ‘Netflix Original Series’. The company plans to expand its content budget to $7 billion in 2017 (up from $6 billion in 2016). This means more than a fresh 1,000 hours of original programming, according to CEO Hastings. Also, due to the relatively low monthly subscription fee of $10 for basic packages, consumers can subscribe to multiple streaming providers, and still be cheaper off compared to traditional cable offerings.

Reports claiming Netflix ‘is done’ are greatly exaggerated. However, investors should wonder if they pay the right price for Netflix’ future prospects. Looking at a 2017 forecasted price/earnings-ratio (P/E) of 85.5-136.9, the answer would obviously be a strong NO. But investing is about the future and since streaming services are far from being a matured business, looking multiple years ahead is more rational. And guess what? At 2020 P/E’s of 15.5-25.8 Netflix no longer looks expensive.

Overall, the Q3 numbers and Q4 guidance published by Netflix proved many sceptics wrong. Far from being cheap at the moment, investors should look further in the future and may find plenty of reasons for optimism. Don’t be to enthusiastic in fading this rally…

Disclosure: The author has no positions in Netflix (NFLX) at the time of writing, nor plans to do so (long or short). The author has a subscription to the streaming service of Netflix.