Netflix Slides On The US Subscriber Growth Rate Concerns
Streaming video provider Netflix Inc. (NFLX) was one of the best performing S&P 500 stocks in 2015, with a gain of about 125%.
However, following the fourth-quarter and fiscal 2015 results, the stock had lost 20% of its value to close at $89.23 on Friday 19, 2016.
Investors wonder whether the growth story of Netflix has come to an abrupt end.
Since its launch, Netflix has added more subscribers in each year than the previous one. The international expansion has been a major reason for such an admirable growth.
During the fourth-quarter, in the US, the company added 1.56 million members, down from 1.9 million in the prior year corresponding quarter. Overall, the company added 5.6 million subscribers in the last quarter, beating analysts’ estimates of 5.1 million. Netflix does not provide geographical distribution of its customers.
For the current quarter, the company expects to add 6.1 million customers, which includes 1.8 million in the US. Netflix stated that it has expanded its presence in 190 countries. Thus, adding 4.35 million international customers during this quarter will not be a Herculean task. However, analysts doubt whether the company will be able to achieve its target for the US. The reason is that domestic subscriber growth, after hitting a peak in 2013, declined in the past two sequential quarters. For fiscal 2016, the analysts expect a decline of about 20% in the domestic subscriber growth.
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For the fourth-quarter ended December 2015, Netflix’s revenue rose 22.8% to $1.82 billion, beating analysts’ expectation of $1.83 billion. Net earnings for the quarter were $0.07 per share, compared to analysts’ expectation of $0.02 per share. For the fiscal 2015, the company’s revenue increased to $6.78 billion from $5.505 billion recorded in the fiscal 2014. However, the net income for fiscal 2015 dropped to $123 million or $0.28 per share from a high of $267 million or $0.62 per share in the corresponding period last year.
Furthermore, during the fiscal 2015, the operating margin has declined to 4.5% from 7.3% recorded in the prior year similar period. The operating cash flow has turned negative (-749 million) for the first time in the last decade. The net margin for the fiscal 2015 has gone down to 1.81% from 4.85% in the fiscal 2014. On the contrary, in the fiscal 2015, the debt to equity ratio has increased to 1.07 from 0.48 recorded in the fiscal 2014. Even after a considerable fall in the price, the forward price to earnings ratio of Netflix is close to 83.39. Thus, considering the above facts, fundamentally, we can expect the stock to decline further.
Technically, as shown in the image below, the stock had fallen below the 50-day and 200-day moving average. The stock has a major resistance at 100-levels.
A technical gap exists between 70 and 76 level. The decline is expected to fill the gap. Thus, a US binary options trader should purchase a put option contract with March end expiry. The suggested strike price for the contract is $75.