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How to Tap Netflix Subscriber Growth with ETFs

Netflix NFLX, the world's largest video streaming company, cheered investors with blockbuster subscriber growth in its second-quarter results after the closing bell on Monday. The company also provided better-than-expected subscriber growth guidance for the third quarter and topped our revenue estimates though it missed on bottom line.

Based on subscriber boom, Netflix shares surged more than 10% following the earnings release in after-market trading and hit a new all-time high.

Netflix Q2 Earnings in Detail

The company reported earnings per share of 15 cents, a penny below the Zacks Consensus Estimate and up from 9 cents in the year-ago quarter. Revenues climbed 32.3% year over year to $2.78 billion, well above our estimate of $2.76 billion. Most of the strength came from global streaming revenues, which were up 35.8% year over year (see: all the Technology ETFs here).

Netflix added 5.2 million new subscribers globally in the second quarter, easily crushing the company’s projection of 3.2 million additions and more than tripled the year-ago additions of 1.7 million. International accounted for the bulk addition of 4.14 million users while U.S. additions were 1.07 million. Solid growth came from the release of more than 50 new programs, spanning 14 new seasons of popular original shows, 13 original comedy specials, 9 original films, seven original series for kids, 6 documentaries and 2 documentary series.

Notably, the video streaming giant reached 103.95 million subscribers globally at the end of the second quarter with international subscribers (52.03 million) outpacing U.S. (51.92 million) for the first time. This indicates its continued dominance in the global streaming media market.

In the ongoing Q3, the company expects to add 4.4 million subscribers, including 0.75 million in the U.S. and 3.65 million internationally. Revenues and earnings per share are expected to be $2.97 billion and 32 cents, respectively. Both numbers are well ahead of the current Zacks Consensus Estimate of $2.88 billion for revenues and 22 cents for earnings per share.

Solid 2017 Outlook

The online video streaming giant is deeply focused on growing its global operating margin with a target of 7% for 2017. The company is in no rush to push up the margin and is instead aiming a steady increase in revenue and operating margin by balancing both growth and profitability. This strategy is likely to help the company win in the long run (read: Sector ETFs & Stocks to Tap Q2 Earnings Growth).

Netflix is on track to spend $6 billion on content, including original shows and movies, to become the world's top movie and TV streaming service. It looks to launch over 1,000 hours of original programming. Some of the content includes Castlevania, Mindhunter, Big Mouth, Marvel series The Defenders, and Season 3 of Narcos. It is also looking to release 40 new films in theaters this year after releasing online. Some of these include War Machine, Okja, Death Note, A Futile and Stupid Gesture, Wheelman, First They Killed My Father, Little Evil, and 6 Balloons.

Though Netflix belongs to a miserable Zacks Industry Rank in the bottom 36%, and has a disappointing VGM Style Score of F along with an inflated P/E ratio of 153 compared with the industry average of 13.86, it currently carries a Zacks Rank #1 (Strong Buy), suggesting continued outperformance. Netflix is primed for growth in the months ahead as it has created an unparalleled lead in the Internet TV business that will likely dominate over the long term.

ETFs to Buy

Investors might want to capitalize on this internet television network leader’s growth and the upcoming surge in its share price with lesser risk in the form of ETFs. For these investors, we have highlighted five ETFs with a higher allocation to Netflix and the potential to be big movers in the coming days.

PowerShares Nasdaq Internet Portfolio PNQI

This fund offers exposure to the largest and most liquid companies that are engaged in internet-related businesses by tracking the Nasdaq Internet Index. It holds about 88 stocks with Netflix taking the fifth spot in its basket with 7.6% allocation. Internet software & services dominates the portfolio with 55% share in the basket, closely followed by internet & direct marketing at 38.8%. The product has AUM of $380.6 million and trades in a light volume of about 29,000 shares a day. It charges 60 bps in fees per year and has a Zacks ETF Rank of 2 or ‘Buy rating with a High risk outlook (read: Trump Slump to Oil Slide: Top ETF Stories of First-Half 2017).

First Trust Dow Jones Internet Index FDN

This is one of the most popular and liquid ETFs in the broad tech space with AUM of $4.5 billion and average daily volume of around 341,000 shares. The fund tracks the Dow Jones Internet Composite Index and charges 54 bps in fees per year. Holding 42 stocks in its basket, Netflix occupies the fourth position at 5%. Internet mobile applications account for half of the portfolio while internet & direct marketing makes up for 20%. The product has a Zacks ETF Rank of 2 with a High risk outlook.

PowerShares Dynamic Media Portfolio PBS

This fund provides exposure to media stocks under one roof by tracking the Dynamic Media Intellidex Index. It seeks to offer capital appreciation by investing in companies that are selected on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action and value. Holding about 29 stocks in the basket, Netflix takes the fifth spot at 5% of assets. Within the media sector, the product is well spread out across movies & entertainments, television & radio, publishing, cable & satellite and internet & mobile applications that account for double-digit exposure each. The product has been able to manage $97.5 million in its asset base while sees lower volume of about 54,000 shares a day. It has 0.61% in expense ratio and a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.

First Trust Nasdaq Retail ETF FTXD

The fund follows the Nasdaq US Smart Retail Index and holds 50 stocks in its basket. NFLX occupies the eight position in the basket with 4.1% of assets. While broadline retailers  and specialty retailers make up for a bigger chunk at 24.2% and 22%, respectively, food retailers & wholesalers and specialized consumer services round off the next two spots. FTXD has accumulated $1.9 million within 10 months of its debut and trades in nearly 2,000 shares a day on average. Expense ratio comes in at 0.60% (read: Tough Time Ahead for Grocery Stocks and ETFs?).

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Netflix, Inc. (NFLX): Free Stock Analysis Report
 
PWRSH-ND INTRNT (PNQI): ETF Research Reports
 
FT-DJ INTRNT IX (FDN): ETF Research Reports
 
FT-NDQ RETAIL (FTXD): ETF Research Reports
 
PWRSH-DYN MEDIA (PBS): ETF Research Reports
 
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