All Eyes on Netflix (NFLX) 1Q18 Earnings Show Tonight

Though Aegis' Victor Anthony is optimistic on NFLX's first quarter, his preview echoes apprehension when glancing ahead to the second quarter guide to come.

Netflix (NASDAQ:NFLX) is reading to serve up its first quarter print for the year once the bells tolls, and while top analyst Victor Anthony at Aegis is anticipating a beat, he likewise braces for a conservative, cautious outlook for the second quarter.

In an earnings preview with both eyes wide open, the analyst warns “watch 2Q guide,” as he reiterates a Hold rating on NFLX stock with a $230 price target, which implies a 25% downside from current levels.

First quarter sub net adds will benefit from buzzing original content of the likes of Jessica Jones to Altered Carbon along with alliances between Altice, T-Mobile DT, Cox, and Verizon, where Anthony draws attention to low churn subs. The Crown, Bright, and Stranger Things were the showstoppers of the fourth quarter, and Anthony highlights “a continuation of the appeal” from these massive hits as well as a boost in marketing spend. Another positive point boils down to overall secular trends of media viewership taking a step of evolution over to the side of the Internet- an upper hand for the video streaming giant.

Anthony is calling for $3.7 billion in revenues from the giant, $463 million in adjusted EBITDA, and $0.64 in GAAP EPS. For context, the Street has set expectations for $3.89 billion in revenue, $451 million in adjusted EBITDA, and $0.64 in GAAP EPS.

Domestic streaming potential could hit 1.65 million net additions by the close of the quarter from Anthony’s estimation, as the analyst projects 56.4 million total subscribers by the end of the first quarter. Anthony expects revenues to surge 24% year-over-year to $1.82 billion on back of subscriber momentum as well as growth in average revenue per user (ARPU) to the tune of 12%- a solid boost compared to the fourth quarter that saw just a 5% rise here. Compared to Domestic contribution margins that hit 34.4% in the fourth quarter, Anthony looks for 37.1% riding a wave of 12% year-over-year Marketing growth coupled with content costs growth of 23% year-over-year.

On the International front, Anthony bets on 6.0 million net additions, which would lead Netflix to close out the quarter with 7.65 million net adds (compared to 8.3 million reached in the fourth quarter of 2017) and 68.8 million subscribers. Moreover, the analyst projects a 71% year-over-year rise in revenues to $1.79 billion on back of sub and ARPU growth of 18% year-over-year, an improvement of the 15% seen in the fourth quarter. Anthony estimates International contribution margins could hit 13.9%, a jump from the 8.7% in the fourth quarter, stemming from a 50% year-over-year rise in Marketing growth and a 54% year-over-year rise in content costs growth.

However, the second quarter faces a challenging year-over-year comp, and leaves Anthony feeling cautious overall about the guide to hit along with the first quarter earnings show: “2Q18, is up against a tough YoY content slate compare, which should lead to a less robust guide. For 2Q18, we project 1.5M Domestic net additions and 5.5M International net additions. The stock, in our view, continues to respond to subscriber outperformance and guidance and we are unlikely to see significant strength in the latter. The shares are up +60% YTD and trading at premium valuations of 70x ’18 EBITDA and +100x ’18 GAAP EPS. For the shares to continue to rally, Netflix would need to beat consensus by a significant margin, guide meaningfully above, show continued progress on operating margin expansion across both markets, show continued pricing power, give investors comfort that cash burn could ease and that the business could turn cash flow positive beyond 2018, and continue to produce hits. This scenario could continue to occur, but it is a tall order.”

Victor Anthony has a very good TipRanks score with a 67% success rate and a high ranking of #77 out of 4,771 analysts. Anthony yields 17% in his annual returns. However, when recommending NFLX, Anthony forfeits 8.6% in average profits on the stock.

TipRanks suggests a bullish lead of the Wall Street pack when it comes to Netflix’s market opportunity, albeit with play-it-safe expectations among these sell-side analysts. Out of 36 analysts polled in the last 3 months, 22 are bullish on NFLX stock, 13 remain sidelined, while 1 is bearish on the stock. With a slight return potential of 2%, the stock’s consensus target price stands at $314.81, indicating caution is baked into analysts’ forecasts.

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