Shares in the internet television network provider Netflix (NFLX) have continued to rally this quarter rising over 47% in the past 3 months. Year-to-date (YTD) the stock has appreciated 105.77% compared to the NASDAQ which has appreciated 7.53%. Netflix reports its FQ2 ’15 results after the market close on Wednesday this week and both Estimize and Wall Street predict a large decline in earnings QoQ. The Estimize community forecasts EPS of $0.46 compared to the Wall Street consensus of $0.32.
In terms of revenue, Esimtize predicts a figure of $1.654B, slightly above the Wall Street number of $1.646B.
As demonstrated by the charts above, Netflix’s management has a persistent track record in under-promising and over-delivering in terms of EPS results. In FQ1 ’15, Netflix outperformed guidance of an EPS figure of $0.60 by over 28%. Shares in Netflix are currently trading at a PE Ratio (TTM) of 183X earnings. With such an incredibly high multiple, the stock is extremely vulnerable to a large decline if Netflix does not deliver in their upcoming report.
The bulls argue that global licensing and improved margins through scale justify Netflix’s high multiple. Investment bank, Nomura, recently reported “Netflix’s international subscriber base will be 65% larger than its domestic subscriber base by 2020E (94mn international vs 58mn domestic), and as such, fixed global content license fees will be spread across a greater number of subscribers.” The positives associated with Netflix’s international growth opportunities are considerable, however, rapid international expansion does not come without additional risks. Netflix’s expansion into Asia and Europe will be significantly impacted by fluctuations in exchange rates and can also be affected by country specific regulation.
With an explosion in Netflix’s share price and PE Ratio, market participants should be well aware of the potential downside risk with owning this stock if it does turn out that they do not meet guidance and expectations this quarter.
(Photo Credit: sumit chauhan)