Netflix, Inc. NFLX is set to report third-quarter 2015 results on Oct 14. In the last quarter, the company delivered a positive earnings surprise of 20%. The company has delivered positive earnings surprises in the last four quarters, with an average beat of 26.09%. Let’s see how things are shaping up for this announcement.
Factors to Consider
Netflix reported stronger-than-expected bottom line results, primarily driven by strong subscriber growth last quarter but revenues fell marginally short of the Zacks Consensus Estimate.
Netflix is planning rapid expansion abroad. At present, Netflix‘s services are available across 50 countries and it has over 65 million users. In Jan 2015, the company revealed its plans to expand its footprint in as many as 200 countries over a period of two years. Recently, the company announced its plans to launch services in four Asian markets of South Korea, Singapore, Hong Kong and Taiwan in early 2016. So far this year, the company has launched its services in Australia, New Zealand and Japan and it expects to cover Spain, Portugal and Italy through the remainder of the year.
However, international expansion and content additions result in cost escalations in the form of technology investments and marketing expenses in the near term. Nonetheless, the consistent increase in Netflix’s paid subscriber base in the streaming segment, both domestically and internationally, is likely to drive top-line growth. These factors are expected to generate significant revenue synergies that will outpace costs.
Further, Netflix faces competition from bellwethers like Amazon.com AMZN, Hulu and HBO, which offer online streaming services in the U.S. The company also faces significant competition from regional players and new entrants like Apple AAPL.
Management projected earnings of 7 cents per share and net income of $31 million for the third quarter of 2015. Domestic and international streaming revenues are expected to be $1,069 million and $524 million, respectively. Total streaming revenues are expected to be $1,593 million. Management expects to add 1.15 million subscribers in the domestic streaming segment and 2.4 million subscribers in the international segment.
Earnings Whispers
Our proven model does not conclusively show that Netflix is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP: Netflix has an earnings ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 7 cents.
Zacks Rank: Netflix has a Zacks Rank #3 (Hold), which increases the predictive power of ESP. However, a 0.00% ESP makes surprise prediction difficult.
Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stock to Consider
Here is a stock that, as per our model, has the right combination of elements to post an earnings beat this quarter:
eBay Inc. EBAY with Earnings ESP of +3.13% and a Zacks Rank #2 (Buy).
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