Earnings preview: Q1 a litmus test for Netflix (NFLX) amid EPS slowdown, competition

Ever since Netflix (Nasdaq: NFLX) established itself as the undisputed leader in the video streaming sector, there have been attempts by rivals to put an end to its dominance.

READ: Netflix Q1 2019 Earnings Coverage

Netflix is preparing for its first –quarter earnings release in a changed scenario wherein it faces tough competition from some of the big names in the corporate world – the latest to join the race being entertainment juggernaut Walt Disney (NYSE: DIS).

When the Silicon Valley tech firm unveils the March-quarter results Tuesday after the closing bell, it is expected to report earnings of $0.57 per share, which is down 11% from the year-ago period and broadly in line with the management’s projection. Meanwhile, revenues are forecast to grow 22% annually to $4.5 billion.

Netflix’s rapid deterioration of cash flow remains a concern for the stakeholders as the heavy investments in content, with a focus on foreign languages, continues to take a toll on the company’s liquidity. At the end of the fourth quarter, it had streaming content obligations of $19.3 billion.

However, the robust content portfolio that includes a huge collection of original movies and TV shows and the continuing expansion into new geographical regions, combined with the superior content quality, will help the company maintain its growth trajectory in the foreseeable future.

The deterioration of cash flow remains a concern for the stakeholders as the heavy investments in content take a toll on the company’s liquidity

In the fourth quarter, Netflix added 8.8 million paid subscribers across the world, surpassing analysts’ forecast and its own projection, with the overseas market accounting for most of the increase. At the end of 2018, it had 139.26 million subscribers globally. Meanwhile, earnings dropped 27% to $0.30 per share in the December quarter, despite a sharp increase in revenues, as margins came under pressure from higher costs. While the recent hike in subscription fees will help improve the situation, rivals might take advantage of it.

Walt Disney rolled out its much-awaited streaming service Disney+ last week, intensifying competition in the streaming arena. Armed with a huge repository of original content, gathered after the recent acquisition of the media assets of 21st Century Fox (FOX), Disney is all set to change the on-demand video streaming landscape.

You may also like: Netflix Q4 2018 Earnings Conference Call Transcript

Of late, Amazon (AMZN) Prime Video, AT&T (T) Time Warner, and Hulu have been ramping up their technical infrastructure and content portfolio, targeting a slice of Netflix’s market share.

After setting records consistently for several months, Netflix shares entered a downward spiral early 2018 and slipped to a twelve-month low by year-end when the market witnessed one of the worst tech selloffs. Overall, it outperformed the S&P 500 last year. The stock, which gained 32% so far this year, ended the week sharply lower.

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