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Netflix (NFLX) to Report Q2 Earnings: What's in the Cards?

Netflix, Inc NFLX is set to report second-quarter 2017 results on Jul 17. In the last quarter, the company delivered a positive earnings surprise of 5.26%. It has delivered positive earnings surprises in the last four quarters, with an average beat of 117.66%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Netflix has been drawing strength from its growing portfolio of original content. Netflix had a very strong programming slate in the second quarter given the new seasons of popular shows like House of Cards and Orange is the New Black. Its new original series, Glow – about female wrestling – also garnered mostly positive reviews. We believe all these will translate into increases in subscriptions.

However, the company faced a setback when its ambitious original movie, War Machine, starring Brad Pitt failed to generate encouraging response from the critics/viewers.

Netflix, Inc. Price and EPS Surprise

Netflix, Inc. Price and EPS Surprise | Netflix, Inc. Quote

This apart, Netflix remains focused on international expansion. We continue to believe that growth will eventually come from international markets as the U.S market approaches saturation. In April, the company announced that it had reached 100 million subscribers, a big milestone for the streaming giant.

We note that Netflix has outperformed the Zacks Broadcasting-Radio/TV industry year to date. While the stock returned 28.2%, the industry gained 11.8%.

However, investors need to watch out for high costs that accompany rapid international expansion and production of original content.

For the second quarter of 2017, management forecasts earnings of 15 cents per share.

Domestic and international streaming revenues are expected to be $1.499 billion and $1.141 billion, respectively. Streaming revenues are expected to be $2.640 billion while total revenue, including DVD business, is anticipated to be $2.755 billion.

Management is likely to add 0.60 million subscribers in the domestic streaming segment and 2.60 million subscribers in the international segment. Domestic streaming contribution profit is expected to be $552 million. On the other hand, international streaming segment is expected to report a loss of $28 million. Netflix estimates the U.S. contribution margin to be around 36.8% in the quarter. The company forecasts operating income of $120 million for the soon-to-be-reported quarter. 

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 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP:  Netflix’s Earnings ESP is 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 16 cents per share. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Netflix has a Zacks Rank #2. Though Zacks Rank #1, 2 or 3 increases the predictive power of ESP, the company’s 0.00% ESP makes surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here is a stock that, as per our model, has the right combination of elements to post an earnings beat this quarter:

Cypress Semiconductor Corp CY has an Earnings ESP of +11.11% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Energizer Holdings Inc ENR has an Earnings ESP of +8.33% and a Zacks Rank #1

Applied Optoelectronics Inc AAOI has an Earnings ESP of +0.94% and a Zacks Rank #2

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