Netflix Earnings Preview: Valuation Concerns Escalating

Netflix [[NFLX]] shares have soared 67% since their last quarterly earnings report, so investors have sky-high expectations for the company’s first quarter 2010 results that are scheduled to be released after the market closes on Wednesday, April 21.


Several Wall Street analysts have downgraded Netflix shares in recent weeks as the recent appreciation in share price now has the stock “priced for perfection”. While the internet sector has outperformed the broader market in 2010, it appears that Netflix may have outkicked their coverage and we would anticipate investors taking profits in the coming weeks.    


While valuation concerns are rising over the stock price, Netflix business appears to be humming along nicely. Compete analytics shows that traffic climbed 26% y/y in the first quarter. The growth in site traffic is likely due both to increases in subscription counts as well as the increasing adoption of streaming content.


Netflix management deserves a tremendous amount of credit for their quick adoption of streaming video capabilities. The company received a considerable amount of positive press regarding their new iPad app. In addition, Netflix now offers streaming capabilities for Nintendo Wii users as well.


In 2009, Netflix’s shares gained over 84%, and easily outperformed the 44% gain in the Nasdaq. This year, Netflix has gained 55% and has been the top performing internet stock.


On January 26, Yahoo provided first quarter gross revenue guidance of $490 – $496 million and GAAP EPS of $.47 – $.58. The current Wall Street consensus estimates are for revenues of $493.1 million and EPS of $.54. We at are anticipating results at the high-end of management’s guidance range with revenue of $495.0 million and $.58 EPS.




Netflix is now trading at 27x consensus 2011 EPS estimates. This is above the relative valuations of their peer group. We would expect NFLX shares to decline in the short term as investors engage in profit taking following the earnings release.


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