A Preview Of Netflix's Q1 Earnings: Q2 Sub Guidance Could Be At Risk

Pacific Crest’s Andy Hargreaves continues to believe there is meaningful upside potential for Netflix, Inc. (NASDAQ: NFLX) in the long term, although the risk/reward is “more neutral” at the current valuation levels.

The analyst maintains an Overweight rating on the company, with a price target of $170.

Q1 Expectations

Hargreaves expects Netflix to report robust first-quarter results, in line with the expectations, saying, “A combination of quantitative and qualitative data points suggest solid domestic pricing and subscriber growth in Q1.”

The analyst also believes the company’s international adoption trended at least in line with the consensus forecast, with material year-on-year growth in interest in several key markets. This is likely to support global net additions for Q1 at least in line with the guidance of 5.2 million.

Q2 Risk

However, there appears to be modest risk to the Q2 international expectations, given that Hargreaves believes the expectations for the quarter might be slightly high.

The analyst estimates Netflix would need to capture 0.55 percent of international broadband households in order to meet the consensus expectations of 2.1 million international net additions for Q2.

“This would be below the multiyear average for a Q2, but slightly above the level experienced last year, which creates some risk, in our view,” Hargreaves explained, while adding, “Despite this potential risk to Q2 international subscriber guidance, we would likely view any modest miss of near-term expectations as a buying opportunity.”

Looking Ahead

Going forward, the analyst believes Netflix would need to make a “broadened strategic effort” to expand investor perception of the addressable market and drive share price appreciation beyond the current price target.

“Although we believe Netflix is extremely well positioned to expand into a variety of areas, timing of potential catalysts related to this is uncertain and seems unlikely to come in the near term,” Hargreaves added.

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