Netflix, Inc.’s (NFLX - Free Report) shares tanked following July’s disappointing earnings report and guidance. But, was the streaming giant’s earnings miss just a passing blip?
Market pundits strongly expect an earnings beat from Netflix in its third-quarter release on Oct 16. If it misses though, then the opinion may change.
Netflix Subscriber Count to Rise
Netflix reported 5.15 million new subscribers in the second quarter, down from 7.41 million of the previous quarter and below 6.2 million estimated by the company. Following the discouraging numbers, Netflix’s shares that had reached an all-time high of $419 fell to $317 in August, only to recover slightly since then. Chief Executive Reed Hastings blamed the weaker-than-expected subscriber growth on faulty internal forecasting and “lumpiness in the business.”
But, we all know that Netflix has time and again made strong comebacks and majority of investors are counting on the same. In fact, the company is expected to add 5.32 million subscribers in the third quarter, almost the same as last year and above the company’s own forecast of 5 million, per analysts polled by FactSet. Among the new subscribers, 650,000 are expected to come from the United States and nearly 4.35 million from overseas markets.
Such solid subscriber expectations can be attributed to the company’s investments in marketing and distribution and robust lineup of original programming. Per analysis by Cowen, 676 hours of original content were rolled out in the third quarter, way higher than 452 hours in the second quarter.
At the same time, analysts pointed out that the company’s services expanded leaps and bounds in the international markets. For instance, more than 50 million people downloaded the Netflix app in the third quarter, with majority of them being not only from the United States but also from Brazil and India, per data from SensorTower. In India alone, downloads surged 100% in the third quarter from the previous quarter.
Can Anyone Catch Up With Netflix in Streaming?
The Walt Disney Company (DIS - Free Report) , with its newly-acquired Fox assets, is fast catching up with Netflix’s streaming business. Needless to say, Amazon.com, Inc. (AMZN - Free Report) , Apple Inc. (AAPL - Free Report) and HBO are pouring cash into the streaming business.
But, Netflix knows about the importance of retaining subscribers in the new media environment. After all, the mantra is not only to grab attention on a particular night but to have a dedicated subscriber base. This insight has lent Netflix an upper hand over its competitors.
By the way, Netflix doesn’t always need to show profits as long as its subscriber base keeps expanding. After all, when the company has enough subscribers willing to pay for content at higher prices, profit margins will improve.
Netflix Will Have a Good Earnings Report
With subscriber count expected to have grown in the third quarter, and Netflix’s streaming service far ahead of competition, the earnings numbers should surely impress. Netflix, a Zacks Rank #3 (Hold) company, currently has an Earnings ESP of +0.69%. This is Zacks’ proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Upbeat earnings performance, no doubt, will lead to a rally in the share price. Thus, the company’s expected growth rate for the current year is a whopping 111.2%, way ahead of the Broadcast Radio and Television industry’s estimated rise of 12.2%. In fact, the company has outperformed the broader industry so far this year (+73.5% vs +23.5%).
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