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Netflix’s Monster Beat Continues To Show Why Shares Are Still Cheap
Expectations were high for Netflix, and the company delivered in a big way, adding 7.41 million new subscribers in the quarter. Total subscribers now stand at 125 million, and the company is guiding for that number to climb to 131.20 million at the end of the second quarter. The beat was driven by international growth as we expected, with nearly 5.46 million new subscribers in the quarter, down sequential from 6.36 million, but again google trends was suggesting strong international growth, but not as strong as the last quarter.
It was US growth that was very strong, with nearly 1.96 million net adds, primarily in line with the fourth quarter. Surprising to me. The strong domestic subs were very impressive, with the growth coming despite the price hike last fall, and suggests the price is likely still too low. I think even at $19.99 a month it would not hurt the companies ability at growing revenue.
Guidance was solid too. There is nothing from what I can see from my quick look that suggests anything bad.
145 Million Subs By Year End
The company is now on pace to eclipse 145 million by the end of 2018, based on my model.
The stock is trading around $325 in the after-hours, and that clears resistance at $323, but we shall see what happens in the morning. I expect that the stock will be up tomorrow.
Can Still Rise
The stock is likely still cheap based on expectations of earnings growth of around 55 percent in 2019 and 2020, with earnings forecast in 2020 of $6.58. A PEG ratio of 1, gives the company a 55 earnings multiple and the potential to rise to around $360, based on those 2020 estimates. It sounds crazy, I know, but remember Netflix gave guidance of $3.934 billion for the second quarter, and that comes ahead of estimates of $3.893 billion. It means that revenue estimates need to come up and so do all those earnings estimates.
ARPU Second Ingredient
Additionally, the ARPU for the latest quarter rose to $9.86 per month, up from $9.31 per month in the fourth quarter. Also based on those estimates, ARPU is expected to be $10.01 for the second quarter. ARPU is trending higher and looks to be heading towards $11.75 per month by year end too. The higher ARPU climbs, plus the addition of more subscribers has a multiplying effect on revenue.
With 145 million subscribers at $11.75 per month, the company could be looking at total revenue in 2019 starting the year around at over $20.5 billion. That is about $1 billion more than current estimates of $19.47 billion.
International growth remains in the early innings, and I expect this part of the business will only accelerate. Additionally, one must remember that ARPU in the latest quarter for the international segment was only $8.70 per month vs. $10.70 per month for the US. So the ARPU is likely to continue to climb as well in the international segment.
The S&P 500 got up to 2,686, within striking distance of 2,691, which I noted yesterday as the next level of resistance. I drew in a new uptrend in the S&P 500 chart for the first time in a while, as it has become a little bit more clear now.
A rise above 2,691 puts the S&P 500 on pace to reach 2,713, filling a big gap, from at the end of March. The Vix also fell below 17, as volatility continues coming out of the market.
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Michael Kramer and Clients of Mott capital own shares of NFLX,
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