My primary concerns revolve around the mounting competition from rivals, the company's continued poor cash flow, and weaker second-quarter guidance.
Revenues increased 22.2% year over year to $4.52 billion. That doesn't exactly stack up to first-quarter 2018's growth rate of 40.4% but it'll do.
Operating margins narrowed to 10.2% versus 12.1% a year ago. Net income increased by 18.6% to $344 million. On a diluted basis, that income breaks down to $0.76 per diluted share vs. $0.64 per share a year ago.
A big piece of Netflix's stock performance always revolves around user growth. The streaming giant didn't disappoint in that category. Global paid memberships increased 25.2%, year over year, to 148.86 million.
Cash flow was another story. Though the company has provided plenty of guidance and heads up on the fact that cash flow would be less than appealing, it still burns the eyes to read that free cash flow for the quarter was negative $460 million. This remains the company's thorn. Netflix's content is amazing, but it comes at a price well above what the company can actually afford with their current business scale.
The stock is mixed in after-hours trading, down about 1% in after-hours trading at the time of writing. On the one hand, the company continued to improve its revenues and earnings, as well as maintaining subscription growth. On the other hand, second-quarter guidance suggests weaker earnings year over year.
Netflix expects second-quarter 2019 revenues of $4.93 billion. That would represent a 26.1% growth rate year over year. It would be well below last year's growth rate of 40.3%, but it's admittedly harder for Netflix to show big percentages as its revenue stream gets larger.
The company also expect operating margins to widen to 12.5% vs. 11.8% a year ago. However, the bearish stat that I think is weighing on the stock is the projected second-quarter net income. Netflix expects to make $249 million in the second quarter. That would mark a 35% decline year over year. On an earnings per share basis, that would be $0.55 per diluted share compared to $0.85 per share in second-quarter 2018. That's a hard forecast to handle.
As for users, Netflix is forecasting subscription growth of 23.7% to 153.86 million for the second quarter. That would be slightly slower than second-quarter 2018 subscription growth of 25.6%, but it's still pretty good. Thus far, I remain impressed in how the company has maintained user growth.
Looking forward, I do begin to worry that this will be the last easy year for the company. As competition continues to develop, users may begin to sway in different directions.
We're not talking about a rival startup. We're talking about one of the most successful and deep-pocketed media/entertainment companies on the planet.
Disney has maneuvered itself into position to come in swinging. It has Hulu as a medium for a content structure similar to Netflix, but also offering bundles that include HBO, Showtime, etc. With its own streaming service, it will be largely denying Netflix access to its massive library of content. As this happens, I think Netflix will be forced to put even more money into creating its own original programming, thus pressuring cash flow even further.
Netflix largely waved off the concerns that Disney, and to a lesser extent Apple (AAPL) , will damage its user growth, but I am not so sure (I'm less convinced about where Apple is going to fall into this whole equation. They don't have the background in this sort of thing, and I could see them taking a more cooperative stance with other companies).
I tend to view this market a bit more tightly than some. Consumers are not going to pay a subscription fee for every one of these streaming services. They might in the beginning, but we've already seen prices begin to rise at Netflix as it tries to manage the costs of its content production. If competitors undercut them, while also bringing in quality entertainment, I think the Netflix's stock price could be threatened.
I view Netflix as a "hold." It's simply way too expensive even with the nice earnings release. To me, the company had its chance to find a cash flow positive business model with minimal competition. Unfortunately, that opportunity is quickly eroding. There's too much uncertainty to call it a "buy."