Netflix will report its most pivotal earnings in years today. Here’s what Wall Street is looking for.

‘The Politician’ Netflix
  • All eyes are on Netflix this week as the company prepares to report earnings for the third quarter on Wednesday.
  • The streaming giant missed forecasts for subscriber growth during the second quarter, and its stock has taken a beating since.
  • Investors will look for Netflix to add at least 7 million subscribers, address competition from Disney Plus and Apple TV Plus head on, and continue boosting its average revenue per user as overall growth slows.
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All eyes are on Netflix this week as the company prepares to report earnings for the third quarter on Wednesday.

Last quarter, the streaming giant badly missed expectations for subscriber growth and lost members in the US for the first time in eight years. The stock plunged on the big let down and has yet to recover. Shares were down about 20% on Monday, from three months earlier on Monday, closing at $US285.53.

Netflix’s next earnings report on Oct. 16 will be pivotal for investors evaluating whether Netflix’s subscriber woes are a blip or symptom of a more worrisome trend.

The third quarter was Netflix’s last full period before streaming newcomers Apple TV Plus and Disney Plus launch in November, to be followed by HBO Max and Peacock early next year. Wall Street will be looking for a strong showing to assuage fears that those upcoming offerings will eat into Netflix’s subscriber base, and batter its stock.

Investors will be focused on a few key areas this quarter:

Netflix needs to add at least 7 million paid subscribers

Netflix said it plans to add 7 million paid subscribers for the third quarter to reach a total of nearly 159 million worldwide. That would be record growth for the third quarter, if Netflix actually hits its target.

Analysts seem largely split on whether it will. If Netflix misses on subscriber growth again, it would be the first time in recent memory that Netflix missed its own forecasts two quarters in a row.

Investors are also looking for Netflix to add paid subscribers in the US, after losing 126,000 last quarter, and step up its growth internationally. Netflix said it expects to add 800,000 paid subscribers domestically, and 6.2 million abroad.

There are few early signs leaning in Netflix’s favour:

  • Data provided by SimilarWeb to Business Insider suggests that Netflix’s usage picked back up during the third quarter quarter in key international markets like India, where Netflix struggled during the second quarter.

  • There weren’t any major price hikes last quarter, which dampened Netflix’s growth during the previous period. Analysts at investment firm Bernstein, which has been tracking price increases, spotted rate hikes in only Chile and New Zealand this period.

  • Netflix boosted its output of original programming last quarter. It blamed the prior quarter’s miss, in part, on a content slate that didn’t deliver. During the third quarter, it released new seasons of popular shows like “Stranger Things,” “Sacred Games,” “Glow,” “Orange Is the New Black,” and “Mindhunter,” as well as movies like “American Factory,” the first Netflix documentary produced by Barack and Michelle Obama.

    • Netflix put out 7% more hours of original programming during the third quarter compared to a year ago, for a total of about 720 hours, estimated equity-research firm Cowen, which has an “outperform” rating for Netflix.

Nonetheless, investors are still worried about marquee licensed shows that will soon be leaving Netflix, like “Friends” and “The Office,” which third-party data has shown people in the US spend a vast amount of time streaming. Those two shows will be moving to rival streaming services after their current Netflix deals expire.

Investors want to hear how Netflix plans to fend off new rivals like Disney and Apple

In the past, Netflix has taken a rather laid back approach to new rivals, arguing that “competition makes you better” and that it is already battling for attention against everything from sleep to Fortnite that a little more won’t hurt.

But, lately, management has started addressing questions about new players head on.

“While we’ve been competing with many people in the last decade, it’s a whole new world starting in November,” CEO Reed Hastings said at a conference in September, as Variety reported. “It will be tough competition.”

The streaming wars have gotten fiercer in the days since. Disney barred Netflix from advertising on most of its TV channels ahead of the launch of Disney Plus, The Wall Street Journal reported in October.

Netflix’s share of the US streaming market, relative to Amazon Prime Video, Hulu, and HBO Go, dipped to 67% during the week of Sept. 23, from 72% at the start of the year, data firm Jumpshot found. Netflix’s overall US viewership was down 16% year over year, according to the data.

Netflix Market Share Infographic
Netflix share of US streaming traffic, compared to Amazon Prime Video, Hulu, and HBO Go. Jumpshot

Another miss by Netflix may ignite concerns that streaming giant isn’t prepared to face off against players like Disney Plus and Apple TV Plus, which will be coming for its streaming audience. Netflix’s response to the quarter, and strategy for maintaining its lead in streaming, will also be key alleviating investor concerns in that case.

Netflix also needs to show it’s continually making more money off the subscribers it has

With Netflix’s subscriber growth slowing now that it has amassed an enormous audience around the world, the streaming company needs to shows that it is making more money off the customers it has.

Investors recently started placing more weight on another metric, growth in average revenue per user, or ARPU. ARPU rose 9% year over year last quarter on an adjusted basis, excluding a foreign exchange impact. Analysts are hoping for a bigger pick up during the quarter, as more people buy into its higher-priced plans, which allow for more people to stream and download video simultaneously, or offer other features, like ultra high-definition viewing.

Driving more revenue from subscribers will ultimately play into whether Netflix can earn more, while spending $US15 billion on original programming a year, as it plans to this year. Netflix has been burning through cash and sitting on debt to fund its content thus far. It had a free cash flow deficit of $US594 million last quarter, and a long-term debt pile of about $US12.6 billion.

Netflix debt business insider intelligence

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Still, many analysts think Netflix will come through in the long run. One analyst even argued that the negative sentiment presents investors with a good time to buy, if they can wait out the uncertainty in the coming months.

“While trying to predict Netflix’s quarterly results has always been an exercise in futility, we believe the breadth and depth of negative sentiment creates a unique buying opportunity heading into 2020,” Rich Greenfield at LightShed Partners wrote in a Oct. 11 note initiating coverage with a “buy” rating.