Netflix Has a Robust Growth Profile, but Upside Is Priced In
The video content provider's investments in marketing and original series should deliver solid returns, but shares are already at overvalued levels.
Commentary
Netflix's (NFLX) second-quarter results were slightly above both management's outlook and our own expectations. The firm continues to build a solid foundation, ending the reporting period with more than 50 million global streaming subscribers. We continue to have a favorable view of management's decision to slowly raise prices, though we've already included increases in our expectations. Netflix is also investing in marketing and proprietary content, both of which we believe will deliver solid returns.
We like what Netflix is doing, but we think much of the upside has already been priced into the stock at current levels. The wild card is how quickly--and how successfully--Netflix is able to tick up its prices.
Consolidated revenue grew 25.3% year over year, to $1.34 billion, driven once again by net domestic streaming customer growth. Operating profit expanded to $129.6 million, up from $57.1 million last year, and slightly better than management's $125 million forecast. The operating margin improved about 4 percentage points year over year, to 9.7%, as revenue growth continued to outpace content cost increases. We're encouraged by the continued margin improvement.
While management forecast a $42 million operating loss for the international segment during the current quarterly reporting period, this expected loss is primarily due to the planned launch in six European markets (Germany, France, Austria, Switzerland, Belgium, and Luxembourg) in September.
At $1.15, diluted earnings per share was up sharply from $0.49 in the year-ago quarter. Management expects 1.33 million domestic net customer additions in the third quarter, up slightly from a year earlier, and international subscriber growth of 2.36 million, up from 1.44 million, due largely to the additional 60 million addressable homes to be added via the market expansion in September. Given the market expansion and number of broadband homes yet to be addressed, Netflix's growth profile remains robust.
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