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Market Update

Earnings on Tap: Netflix

Given the increasing competition, the company's ultimate growth potential and long-term profitability is doubtful

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Online video-subscription service provider  Netflix (NFLX) is set to report first-quarter numbers after market close Monday. Earnings per share are expected to come in at $0.18 compared with a loss of $0.08 per share reported in the year-ago period.

Last quarter, the company surprised Wall Street by posting a small profit as against expectations of a loss, as purchases of Internet-connected televisions and tablet computers during the holiday season boosted demand for the company's services. Netflix added more than 2 million members in the fourth quarter, ending the year with more than 27 million domestic members.

The company said it expected the domestic streaming contribution profit to be larger than profit from its DVD segment in the first quarter. However, net income is expected to be relatively flat this quarter as improvements in both domestic and international streaming profits would be offset by a decline in DVD contribution profit and higher global operating expenses. Morningstar analyst Michael Corty agrees with the company’s outlook. According to Corty, international business will incur operating losses for the next several years at a minimum and will struggle to generate meaningful profits.

Given the increasing competition and potential for content owners to retain most of the economic profits, Corty doubts the ultimate growth potential and sustainable level of long-term profitability of Netflix.

Gazala Parveen does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.