Strong Netflix subscriber performance has investors cooing, analysts pushing estimates upward

The continuing rise of subscription video on demand (SVOD) giant Netflix (NASDAQ: NFLX) has analysts cooing over its performance, with at least 7 revising their estimates for its annual performance upward in the past 30 days, an investment research firm noted, and terms like "blue sky" being bandied around in the wake of its strong second-quarter numbers.

Zacks Investment Research added that estimates are trending towards favorable, increasing from 4 cents per share one month ago to 8 cents per share, "a significant move."

"The current Netflix narrative is perfect and nearly impossible to debunk in the near-term as linear TV consumption has been in a 12 month free-fall. Netflix has won and traditional media has lost," MoffettNathanson analyst Michael Nathanson wrote in a summary on the provider's earnings and growth potential.

While maintaining its "neutral" rating on Netflix, MoffettNathanson increased its price target for the stock to $98.

Jefferies analysts, meanwhile, raised their price target from about $71 to $86, giving it a "Hold" rating and sounding a slightly cautious note on the cost of international expansion and worsening contribution margins in this area.

However, although MoffettNathanson agreed that the Street's "increasingly Blue Sky (hallucinogenic?) view of Netflix's international operations" was problematic and that the differences between domestic and non-domestic markets may be significant, it added that "the market will have no reason for doubts for a long time."

Netflix added 3.3 million new subscribers in the second quarter of 2015, a record for Q2 growth and nearly double that of the same period one year ago. The additions bring its worldwide subscribership to more than 65 million.

The numbers were a final flourish to a dramatic quarter for the SVOD provider. Netflix saw its stock prices jump to just over $700 per share during the period, and effected a 7-to-1 stock split ahead of Wednesday's market opening. Earnings per share were reported at 6 cents, above analyst forecasts of 4 cents, when adjusted for the split.

Revenues were in line with the company's guidance at $1.64 billion, up from $1.34 billion in Q2 2014. However, its cost of revenues inched upward, reaching $1.12 billion in the quarter compared to $914 million a year ago.

CEO Reed Hastings told investors in the company's letter to shareholders that "the higher than anticipated level of acquisition was fueled by the growing strength of our original programming slate, which in Q2 included the first seasons of Marvel's Daredevil, Sense 8, Dragons: Race to the Edge and Grace and Frankie as well as Season 3 of Orange Is The New Black."

Hastings also credited U.S. revenue growth to a 5 percent year-on-year increase in ASP (average selling price) due to customers signing up for its $8.99 per month 2-stream HD plan.

On a call with investors and analysts, Hastings said the company has no plans to raise subscription prices anytime soon, noting that its one-stream, $7.99 per month entry level plan is "incredibly affordable and that's what's propelling our growth."

Breaking the subscriber numbers down, Netflix added 900,000 U.S. subs and 2.4 million subs outside the United States.

Despite the jump in subs, Netflix is staying modest in its forecast for Q3, predicting 1.3 million net additions in the US and 2.4 million net subscriber additions internationally, for a total of 3.55 million net subscriber adds.

Revenue grew 48 percent internationally, Netflix reported, even though it didn't launch in any new countries during the quarter and saw an $83 million loss from currency fluctuations. Hastings said that the trend is expected to continue in the second half as Netflix launches in Japan, Spain, Italy and Portugal.

The provider confirmed it is continuing to "explore options" in China.

"China continues to be its own entity in terms of challenges and characteristics in the market. We're taking our time … in finding the path and the right model," said David Wells, Netflix's chief financial officer, during an earnings call investors and analysts. The company still plans to launch in China next year and "are continuing to treat it as its own territory."

The continued costs of expansion internationally were a large part of the conversation during the investor call. "We expect as we invest internationally… over next few quarters, it's gonna get worse," Wells said in response to a question about the company's long-term debt, currently at $2.4 billion.

Content licensing costs as well continue to take a bite out of Netflix's bottom line. The company spent $1.27 billion on additions to its library of streaming content in the quarter. Its free cash flow sits at -$229 million, compared to $16 million a year previous. But the company's top three executives--Hastings, Wells and content head Ted Sarandos--presented an unworried face on the video call. "We've done our best to indicate that a free cash flow is going to diverge … as we invest more in content," Wells said. "It's going to continue as we invest more in original content which is more front end loaded."

For the third quarter, Netflix is forecasting revenues of $1.59 billion, with more than $1 billion of that coming from its U.S. streaming revenues. EPS guidance is 7 cents per share.

Netflix shares were up 10.87 percent in after-hours trading following its earnings report, to $108.80.

For more:
- see the investor letter

Related articles:
Netflix challenges internationally and at home may highlight its Q2 report
Netflix confirms launch in Japan this fall; signs content deal with Fuji Media
Netflix board approves 7-to-1 stock split as shares jump to near $700

Updated to include details from the post-earnings investor call.

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