Earnings season is in full swing and one company in focus is Netflix. The online entertainment company is scheduled to present its fourth-quarter results next Wednesday and consensus expectations point to earnings of 13 cents per share. If the company is able to meet or beat expectations, then it would make it eight of 10 quarters – an impressive streak for any company.
While the top-line numbers will make headlines, analysts will be interested to see what guidance the company gives for the coming 12-months. One challenge facing Netflix is a possible rejig of ‘Net Neutrality’ rules issued by the Federal Communications Commission (FCC).
Under current rules, internet companies need to treat all internet traffic equally. However, incoming President Donald Trump has voiced his displeasure with the rules. In addition, some of his picks to join the FCC point to an increasing probability that ‘Net Neutrality’ will be reversed.
Such a change could have a dramatic impact on the prospects of companies such as Netflix. In the U.S., the change would impact operating costs and even more importantly a shift in domestic policy could give international regulators the lead they need to take the steps. This would dramatically alter the landscape and could benefit cable operators who have been struggling to fight off the rise of streaming video sites.
While a potential change would have a big impact, the fact is that the company’s current financial position is quite solid. Analysts expect that revenue for the quarter will grow by more than 35 percent to $2.47 billion. More importantly, the company is inching towards the billion-dollar mark for international revenues – an important threshold as it points to the company’s ability to expand its market.
That being said, there is some reason to believe that shares of Netflix might be overpriced at the moment. FactSet noted that the average 12-month price target per share is $125.97, roughly 2.5% lower than Thursday’s close. Add to this the fact that Netflix shares for the last year have underperformed the broader markets and some observers believe this might lead to a correction.
Another issue which might impact the company’s growth prospects, at least in the U.S., is subscriber growth. Netflix has always seen itself as a premium content provider, as such, it has eschewed advertising. But given the likelihood of a changing landscape, its views on advertising might change. If not, then it will need to continue investing in original content – a risky bet, even when it pays off.
This is the same conclusion which J.P. Morgan analyst Doug Anmuth reached in his comments on the company. Looking forward, Mr. Anmuth noted the belief that the company will need to create ‘stronger content’ to ‘increased global profitability’. However, he remained confident that the company would add subscribers at a faster rate in 2017 than it is likely to have done the year just ended.