Netflix (NASDAQ: NFLX) has been on fire so far this year, and investors have high hopes that the company can continue its breakout performance. Shares have more than doubled since the beginning of the year, while the broader market, as represented by the S&P 500, has returned a paltry 2%. Netflix has been a beneficiary of a number of analyst upgrades and price target increases in recent weeks, propelling the stock to lofty heights.
Investors will be keeping a close eye on the numbers when the company reports the financial results for the 2018 second quarter on Monday, July 16 after the market closes. Let's review a few metrics that will be of interest to investors going into the company's earnings report.
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Can the pace of subscriber growth continue?
Over the last several years, Netflix has been judged primarily on its subscriber growth -- and this quarter should be no different.
During the first quarter of 2018, the company delivered surprisingly strong customer additions in its domestic market, which many believed was near saturation. Netflix added 1.96 million new viewers in the U.S., up 38% year over year, and blasting past the 1.45 million the company forecast. International viewers grew at an even faster pace, with 5.46 million additions, up 55% compared to the prior-year quarter, and also significantly higher than the 4.9 million Netflix expected. That brought the company's total net additions to a first-quarter record of 7.41 million, up 50% year over year, and bringing its total subscriber base to 125 million.
So what caused the massive and unexpected subscriber gains? In its quarterly shareholder letter, Netflix said, "The variance relative to our guidance was driven by continued strong acquisition trends across the globe which we attribute to the growing breadth of our content and the worldwide adoption of internet entertainment."
For its second quarter, Netflix management anticipates 6.2 million customer additions, up 19% from the prior year quarter. Breaking that down, the company expects to add 5 million new international subscribers and 1.2 million in the U.S., which would represent year-over-year growth of 21% and 12%, respectively.
While subscriber growth is the most closely followed metric, there are others.
On the revenue front, Netflix is anticipating revenue of $3.934 billion, an increase of 41.2% year over year. The company is forecasting operating income of $469 million, more than three times the $128 million produced in the same period last year. The company has even more ambitious goals for net income, which it expects will come in at $358 million, producing earnings per share of $0.79, five times the level achieved in the prior-year quarter.
Netflix management has repeatedly said that it believes operating margins represent the best method for assessing the company's performance. For the second quarter, Netflix expects operating margins of 11.9%, more than double the 4.6% it achieved in the year-ago quarter, though slightly lower sequentially from the 12.1% achieved in the first quarter of this year.
Many will also be watching Netflix's guidance for the coming quarter for signs that the company's impressive growth can continue. Analysts' consensus estimates for the September quarter are for revenue of $4.14 billion, which would represent year-over-year growth of 38.6%, only slightly lower than Netflix's guidance for growth in the current quarter.
Historically speaking, Netflix has made a habit of being conservative with its guidance, allowing it to exceed its own forecasts. Expect this to continue as the company has only missed its own projections on a handful of occasions in recent years.
A word about valuation
It's important to note that Netflix already sported a sky-high valuation -- and that was before its recent sprint. Its price-to-earnings ratio now clocks in at a whopping 265 times trailing earnings, while its forward multiple is 137 times, both up significantly from just three months ago. With the recent market uncertainty regarding trade tensions with China, even if Netflix exceeds its ambitious forecast, that may not be enough to support its frothy valuation. Investors should be aware that the potential for significant volatility exists.
In light of its recent run up, Netflix may have to put up truly stunning numbers to keep its stock price growing. That said, I believe the long-term investing thesis remains intact, regardless of how the stock price reacts after the earnings release.
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