Why Netflix (NFLX) Holds Huge Promise For Investors In 2018

Shares of Netflix, Inc. (NASDAQ:NFLX) jumped more than 9% after the company reported robust first-quarter earnings on Apr 16. The video streaming giant crushed its own expectations for new subscriber additions in the quarter, once again proving that it is going from strength to strength. Netflix has been on a dream run for quite some time now, with subscriber gains clearly helping it to earn more revenues.

Year to date, Netflix is already up 66.7%. So does Netflix have further room for improvement in the days to come? Netflix’s strength lies in the original content it produces, which has seen its subscriber base grow over the years. Moreover, Netflix is no long just a tech giant. It is giving stiff competition to studios like The Walt Disney Company (NYSE:DIS) , Time Warner Inc. (NYSE:TWX) and Twenty-First Century Fox, Inc. (NASDAQ:FOXA) .

Record Subscriber Additions

An expanding customer base coupled with higher prices for its streaming service gave a boost to Netflix’s revenues. The Los-Gatos, CA-based company added 7.4 million customers in the first quarter, surpassing not only analysts’ expectations by around 1.7 million but also its own expectations of 6.35 million. Of these, international subscriber addition accounted for 5.46 million, while U.S. additions totaled 1.96 million.

Interestingly, subscriber additions jumped ignoring the company’s pushed up subscription price to $10.99 in the United States at 2017 end. This certainly did help the company in registering stunning profits. The streaming giant posted $290.1 million in net income, higher than profits generated by it in the entire year of 2016 (read more: Netflix Q1 Earnings Gain From Solid Overseas Growth).

Understandably, people are least perturbed about the hike in subscription and Netflix seems to be riding high on its strong customer loyalty. Since reporting its first-quarter results, shares of Zacks Rank #3 (Hold) Netflix have surged around 5%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Original Content Biggest Strength

Shares of Netflix have surged more than 66% year to date, way ahead of other tech giants like Amazon.com, Inc. (NASDAQ:AMZN) , Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT) , which have gained only 35%, 8.6% and 11%, respectively.

Price Performance of Netflix Vs. Peers

Netflix definitely is changing the entire streaming ballgame by virtue of its high original content quotient. The company entered into the movie business and even earned an Oscar but now, it has a separate plan. Instead of getting directly into competition with the theatres, Netflix now looks keener on streaming movies in the form of web series.

Netflix’s CEO Reed Hastings last week said, “What we’ll do now is mostly focus on series, and standup, docuseries, and great content we can do without disrupting or being perceived to disrupt the movie sector.” Incidentally, the company plans to pump $8 billion in original programming.

Moreover, spending on licensed content is also on the rise, with the company expecting to shell out $17.9 billion this year, up from $15.3 billion in 2017. Understandably, demand for original content is expected to further help Netflix increase its subscriber base, which is definitely going to translate into higher profits.

Does Netflix Have Sufficient Upside?

Netflix has gained a whopping 66.7% year to date. However, the only factor that is going against the stock at this point is valuation. Netflix has a PEG ratio of 3.42 that makes it pricier than the S&P 500, which has a PEG ratio of 1.72.

However, Netflix’s median PEG ratio over a five-year span is 4.93. Additionally, it touched a peak PEG value of 23.60 during the fourth quarter of 2015, which means that it remains pricey but has further room to run.

Moreover, the ongoing market rally has dispelled concerns over valuation time and time again. Tech majors have delivered robust earnings performances for quite some time now, as was yet again confirmed by Netflix’s first-quarter results, which justifies its high valuation. Most importantly, for a company like Netflix that depends largely if not solely on customer loyalty, a stupendous subscriber addition speaks volumes about its sustainable profitability.

Netflix’s whopping 7.4 million subscriber addition in the first quarter coupled with its increased focus on original content gives it room for further upside in 2018.

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