Netflix Update – Pre 4Q15 Earnings

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As Netflix (NFLX: $104/share) readies to report earnings the afternoon of January 19, 2016, we’d like to take a look at what we know, what we expect, and review just how overvalued NFLX remains.

Consensus estimates for the quarter are $1.83 billion in revenue and $0.02 per share. However, those numbers are not the main story. More important are the issues with the company’s business model that are not reflected in the reported accounting results:

What To Expect From Earnings Call

When Netflix reports earnings, we expect much of the same that we’ve seen in the past. Particularly, we expect:

  • Content costs to continue rising faster than revenues.
  • International margins to decline, thereby undermining any domestic margin increase.
  • Domestic subscriber growth to continue to decelerate YoY.
  • Management to project some future date for when international growth will become profitable, thereby attempting to push bear concerns off for another quarter.

How Overvalued Have Shares Become?

We’ve previously pointed out just how overvalued Netflix is by quantifying how many subscribers the company would need to justify its current valuation. At it current price of $104/share, NFLX would have to grow profits by 27% compounded annually for the next 20 years. In this scenario, the company would be generating $859 billion in revenue in 20 years, which at $9.99/month would imply Netflix has 7.1 billion unique, worldwide subscribers. For reference, at the end of 3Q15, Netflix had 69 million worldwide subscribers and the global population is right around 7 billion. It probably makes sense to cut the total addressable subscriber population for Netflix by at least 10-20% given that most Netflix users share accounts with other people.

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector, or theme.

Click here to download a PDF of this report.

Photo Credit: Bill Selak (Flickr)

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