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Netflix (NFLX) Q1 Earnings: Will Higher Expenses Take a Toll?

Netflix, Inc. NFLX is set to report first-quarter 2016 results on Apr 18. In the last quarter, the company delivered a positive earnings surprise of 250%. The company has delivered positive earnings surprises in the last four quarters, with an average beat of 70%.

This streaming giant saw robust growth in the past year driven by rapid geographical and content expansion plans. But if we look closely, the trend may not continue this time around. Let’s see how things are shaping up for this announcement.

Factors to Consider

Last quarter, Netflix surprised everyone by launching services in 130 new countries simultaneously, establishing its presence in a total of 190 countries. In addition, the company had taken quite a number of initiatives to expand its content portfolio rapidly.

However, investors need to watch out for astronomically increased expenses, which are likely to affect financials this time around. The company itself had projected margins to be soft in the first quarter of 2016 as it will be the first to include the after-effects of such massive international expansion. Even revenues will be adversely impacted as the company made the services available for free in the first month to attract new users.

In such a scenario, even the company’s strength in original programming and a decent paid subscriber base might not be enough to overcome the woes. Furthermore, the company also faces stiff competition from bellwethers like Amazon.com AMZN, Hulu and Time Warner’s TWX HBO.

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 ESP of -100.0%. That is because the Most Accurate estimate stands at break-even while the Zacks Consensus Estimate is earnings of 3 cents.

Zacks Rank: Netflix has a Zacks Rank #3 (Hold). Though a Zacks Rank #1, 2 or 3 increases the predictive power of ESP, the company’s negative 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:

Intel Corporation INTC with Earnings ESP of +4.08% and a Zacks Rank #3

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