The Netflix Stock Stability Question

Apr 10, 2019
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Puzzling to Investors is why Netflix stock has barely moved up or down despite shifts in the climate the company operates within.

Last Quarter’s Earnings Recap

Q4 for Netflix is typically the worst quarter financially for the company, as many of their license renewals for television and movies are towards the end of the year. As a result, their operating profits were 5% in the quarter, while the annual average is roughly 10% for the company. As a side note, they were also affected by the stock market slump that happened on December 24th, when many stocks fell sharply for the day. When they provided their financial guidance for Q1 2019, they expected 8 million global net additional subscribers but didn’t indicate their strategy to do so.

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Netflix Q1 2019 Preview

The biggest news from Q1 for Netflix was the price increase implemented across the United States between $1-$2 depending on the plan. The domestic market is the most profitable per user for the company and where they have reached the highest percentage of TAM or Total Addressable Market. The previous price increase for Netflix was October 2017, where the price for standard streaming went from $10 to $11, and despite the increase, Netflix still recorded 2 million more domestic subscribers. The two questions that remain for Q1 are: how much more can Netflix grow domestically? And is the product inelastic enough to tolerate the price increase again?

International streaming is becoming more and more important to the company, and they have more flexibility in markets they aren’t reliant on like their domestic market. They announced at the beginning of Q2 2019 mobile only streaming plans as a trial in India, that is weekly instead of monthly plans to attract more users to the platform but still offer segmentation.

In the United States, they are taking a completely different approach, dropping support for Airplay 2 for what they claim are standard of quality reasons. The difference in approach only signifies the companies markets further, where low cost all mobile devices are offered in one region and increase oversight in certification in another.

With all this news for the company in addition to an analyst downgrade in the quarter, the stock has remained relatively stable since the last earnings report, with the price staying between $330 and $370 for a stock that has been historically volatile.

The Elephant in the Room

The biggest story for Netflix likely won’t even come from their quarterly results next week, but rather the unveiling of Disney+ service details tomorrow April 11th at their Investor Day presentation. Netflix licenses a lot of content from Disney across different markets and depending on how those deals look in the future would have a significant impact on their stock. It looks like the next week will be the most volatile one the company has seen since January as investors wait to hear the details. 2019 is likely to see major shifts in both the global economy and the streaming industry in general, and the companies ability to adapt will be the real driver of revenue for the year. We'll have earnings up as Netflix has them reported with their quarterly interview.

 

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