Focus on Netflix, as the Company will Release Q2 Earnings
This week will see large companies like Goldman Sachs, Morgan Stanley, and Bank of America release their second quarter earnings. While investors will focus on these large companies, they will also focus on Netflix, which is scheduled to release its earnings on Tuesday.
Netflix is known as the company that revolutionized the media consumption industry. Its revenue model is one of the simplest. It makes money from the subscribers, who pay between $9 and $12 a month to watch unlimited content. Today, other companies with a similar revenue model have come up.
With Spotify, you can listen to unlimited music every month by paying a fee of just $10. For a small fee, you can drive a posh Mercedes Benz and read unlimited magazines.
Over the years, the company has seen its revenue grow from just $3.6 billion in 2012 to more than $15 billion in 2018. The number of subscribers have grown from more than 30 million subscribers in 2012 to almost 150 million in the first quarter of this year. Further, the company has seen its valuation rise to almost $150 billion, making it one of the biggest media companies in the world.
→ How to invest in future trends
How Netflix Operates
Netflix operates in a simple model. It spends billions of dollars to develop its own shows. This year, it expects to spend almost $20 billion to produce its own originals. For the rest of the shows, it licenses from other companies like Disney, Comcast, and AT&T. For example, Netflix pays Warner Media, now owned by AT&T more than $100 million per year for Friends.
In this earnings season, investors will focus on Netflix because of the challenges that it is facing. First, most of all the companies that give it shows like Disney and Warnermedia are in the process of starting their own streaming companies.
To do this, these companies will pull out the content that is in Netflix and put it in their platforms. This is one of the main reasons why Netflix has been spending billions of dollars to create its own shows. It is also a major risk because most of Netflix users usually sped most of their time watching the licensed shows.
As a result, the company has been using billions of dollars to produce its own shows, but some of them have been failures and have been cancelled within a short period.
Another big issue that Netflix has is that its debt is growing. The company has a debt of more than $8 billion and this is expected to continue growing as the company increases its investments in production. As interest rates rise and liquidity tightens, the company might be in trouble.
Further, the company faces a problem of subscriber growth. With member numbers rising, the company will need to address the issue of whether the growth can continue. In the last quarter’s analysts call, the company’s management warned investors that the current growth will likely not continue for long.
→ Earnings Season: 5 metrics that help you to maximize profits!
What investors will focus on
Therefore, in this week’s earnings release, investors will pay close attention to the company’s performance and decide whether the current growth justifies the earnings multiple. Today, the company has a forward PE multiple of 109 and a TTM PE value of above 100. These are significantly stretched multiples that investors will be paying attention to.
YTD, the stock has risen by more than 40%.