Netflix: Just Keep Buying – Netflix, Inc. (NASDAQ:NFLX)

After the bell on Monday, shares of streaming giant Netflix (NFLX) rallied about 6% after the company’s Q1 earnings report. The company again blew past estimates for subscriber growth, leading to a strong revenue beat and earnings that were decent after considering the bond readjustment. I think shares are likely to continue higher from here, meaning new all-time highs should be coming soon.

Netflix added more than 7.4 million subscribers in the period, blowing past many estimates. Even despite finishing off the price adjustment in the US, consumers still added the domestic service at a rate that was more than the company guided for. What impressed me most is that total revenues grew more than 40% over the prior year period, and this included the fact that DVD revenues dropped by more than $21 million. Netflix is only a few months away from reaching a $4 billion quarterly revenue rate.

On the bottom line, earnings per share of $0.64 matched expectations. This might not impress many given the revenue/sub beat, but the $290 million net income figure also included a $41 million loss on the euro bond. I continue to believe that many street estimates are forgetting about this quarterly adjustment, so the weaker dollar hurts the reported bottom line. On the positive side, Q2 EPS guidance of $0.79 was well above the $0.64 the street was looking for, and Netflix is now forecasting operating margins of 10-11% for the year, up from 10% previously.

Due to the timing of payments, Netflix only burned through $287 million of cash, but still expects to blow through $3 billion to $4 billion this year. This is a main point of the bear case, but it really doesn’t matter at this point. Netflix only needs to raise about $2 billion in debt currently, which even at a 6% rate means $120 million more in annual interest costs. Operating income in Q1 alone was up $190 million over the prior year period, so there is still plenty of room for earnings to grow even after debt is added. With a market cap after hours of over $146 billion, $2 billion in debt is a drop in the bucket.

I remain positive on Netflix because there is still plenty of room for growth with a company still at only 125 million global subs. Management talked about deals with Sky and Comcast (CMCSA) that not only will bring in more subs, but also can reduce churn and upsell existing subscribers. I also believe that the strong product offering leaves room for further price hikes to around $15 a month, some of which will flow to the bottom line. As earnings grow, cash flow will improve, so debt increases won’t be as much say 3-5 years out.

Again, borrowing another $2 billion a year isn’t much when you have a market cap at $140 billion that is growing by the quarter. Just compare Netflix to Disney (DIS) for instance. Disney has net debt of around $21 billion with a market cap of $150 billion, while Netflix is currently at $4 billion and $146 billion, respectively. Does anyone think Disney is in financial trouble? No, so why think the same of Netflix right now when it has even less debt? Look for there also to be a lot of media coverage in the near term if and when Netflix surpasses Disney in market cap.

Netflix shares are at $326 in Monday’s after-hours session, less than $8 from their all-time high despite how far the market is off its highs. After another stellar earnings report, Netflix’s future remains very bright. At the pace Netflix is on, we’re only a couple of years away from 200 million subscribers, at which point revenues and earnings will be at much higher levels. That will further ease concerns about cash burn, which aren’t really meaningful in my opinion anyway. Assuming we don’t get a dramatic decline in the overall market, I think Netflix will reach a $200 billion market cap in the coming years as it continues to revolutionize the streaming media space.

Disclosure: I am/we are long DIS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

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