With the new earnings season heating up, this week is a big one for me.
It will be interesting to see where the focus rests within Netflix's earnings. Will investors begin to look at earnings and cash flow versus user growth? Or will the emphasis on subscriptions continue to rule the day?
Aphria (April 15)
I own Aphria Inc. (APHA) , but do not expect much in the company's fiscal third quarter 2019 earnings release.
I don't think there's been enough time for Canadian cannabis firms to put together the sales necessary to show us much in profits. There were likely still a great many costs incurred in the quarter as these companies try to finalize their production goals and expansions.
Estimates are showing a loss of $0.04 per share for Aphria. While that certainly wouldn't be the biggest nightmare in relation to other names within the marijuana industry, it's still a tough sell when you look at the share pricing.
The catch here is that these stocks simply aren't value based at all. They're all speculative growth plays.
I have traded Aphria a few times. It piqued my interest because it was one of the first medical marijuana companies that was actually profitable. The losses only kicked in after the company began the expensive process of creating a supply of the scale needed for recreational sales. Even now, there is talk of many shortages within the market, and I think Aphria has more room to go.
I won't sell my position if these earnings disappoint. I don't think there's been enough time for producers to really see the benefits of full scale yet. If anything, I might add to my position if things take a hit.
Aphria has lost favor with some due to its drama over short-seller accusations, and the exit of key executives. Personally, I think the production capacity being put together by Aphria makes it one of the more promising names. Canopy Growth Corp. (CGC) has certainly taken center stage after its huge cash infusions from Constellation Brands, Inc. (STZ) , but I remain interested in seeing what happens with Aphria as the recent controversies slowly fade away.
Netflix (April 16)
The timing of this earnings release is rather dicey for Netflix. Disney's announcement of its own streaming service launching in November is a real problem for morale. I've said before that Netflix needed to take advantage of its head start as a streaming service. It has failed to do so in terms of creating a profitable enterprise from a cash-flow perspective.
Whereas past earnings reports have revolved around user growth, I have a feeling this might be the first quarter where valuations or cash flow begin to punch the stock price. Netflix has created unquestionably strong content, in my opinion. The problem is the cash flow involved in creating great programming has been too great. As more players begin to venture into streaming in a big way, it begs the question of whether Netflix's spending will keep drawing in new-user growth.
That's the big thing here. Netflix has always been about scaling itself through providing great content in order to create large-scale profitability down the road. While the company has found profits, and is expected to report $0.56 per share in the first quarter, that would mark a decline from last year's $0.64 per share. On top of that, Netflix's previous guidance suggests that we're still going to see weak cash flow. All of this might not be such a big deal if the stock wasn't facing higher competition.
You can see the toll that a P/E of over 100 is taking on the stock, as the shares were down over 4% Friday reacting to news of Disney's announced streaming initiatives. Let's not forget Disney also controls the majority share of rising service Hulu. It's a big problem for Netflix, and I expect the story will become ever more pervasive in the coming quarters.
Disney has proven its ability to derive big profits from its content creation. One might even argue they're the best at it. I think Disney's announcement is going to take some real wind out NFLX this week, unless the company manages to show surprise numbers on both user growth as well as earnings.
Looking past this sole earnings release, we still face the prospect of a hardcore content war erupting between these two names as well as others.