Netflix: You Have To Do The Earnings Math, $650 Target Price
If you start to do the earnings math for next year you you start to get big numbers. I know the sell-side is too chicken to put big earnings numbers out there but we're not. (Oh no you didn't, You can't call the sell side chicken) That means that you can get regular quarterly earnings upside as long as the rest of the sell-side wimps out. (Wimps out? Elazar, you can't say that either.) Sorry sell-side, but true.
If you look at our earnings model you see we're not doing anything so fancy. The EPS guide for Q2 calls for a ridiculous percent year-over-year and the company said something to the effect that they are early in international growth and the margins should continue to improve. They even said that they are doing 300bp margin improvement a year which hinted to what they think they can do in the coming year(s). PS they will do more than 300bp this year.
I'll tell you I felt like I was in the gym trying to bench-press 300 pounds trying to force my numbers up for 2019. Don't try this at home but we did, sweat and all, to bench-press a 300 bp improvement in our earnings numbers for 2019. The earnings numbers are just too big. But we did it. And we get $6.50 in EPS for next year. The Street's at $4.29 for 2019. I think they are way off. Those numbers need to go up. (Sell-side needs a bench-press coach.)
Our $6.50 in EPS assumes 75% growth off of our 2018 number. But the EPS guide for next quarter is calling for some multiples of that earnings growth. And the company said international growth will drive margins higher.
I'll take a breath....
Gross margins were up 300bp+ this quarter. Their guide implies gross margins need to be up much more than that next quarter. Gimme a break. That's nuts. Look at our model to see how we flow it through based on the results, their guide and what they said about the future.
They also said last quarter they are seeing expense pressure "moderate" and they are having "more confidence in the income statement."
We saw that this quarter.
They also said this quarter that they just can't spend back the upside fast enough. Go find another story like that. This one's nuts.
A word about valuation. The low end of Netflix' historical PE valuation is 100X. We're using that. Even 50X we'd get about 50% stock price upside.
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Get Ready, Reading Comprehension Time:
Last Night Netflix hinted:
A) They plan to start a White House reality show which received Congressional approval.
B) They are going to start a new "boring" movie division targeting a new demographic.
C) They are retiring, they had enough, the CEO's tired of Holywood.
D) That earnings are going to get nuts.
Please answer in comments.
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