- Reports Tuesday, October 16, after the close
- Revenue Expectation: $4B
- EPS: $0.68
There is little room for failure when Netflix (NASDAQ:NFLX) reports its Q3 2018 earnings later today after the US market closes. A repeat of Q2’s miss on net subscriber additions, when the streaming giant disappointed analyst expectations, will likely drive investors to punish the stock even more furiously than they did in mid-July, when the stock fell 14% immediately after the report was released.
Netflix Daily Chart: June-October 2018
Since that disappointment, Netflix shares have been in hot water. Investors have been waiting on the sidelines to make sure that last quarter’s weakness was just a blip in the company’s remarkable growth story, rather than the start of a new trend.
In July, Netflix reported 5.15 million new subscribers for its second quarter—a drop from the previous quarter’s 7.41 million, and from the 6.2 million the company had forecast. The stock, which had hit an all-time high of $423.21 in the period before the report, tumbled afterward. To date, with shares trading at $333.13 as of last night’s close, the stock has plummeted by 21%.
Analysts polled by FactSet expect Netflix to post earnings of $0.68 per share for the third quarter today, registering a 134% jump from a year ago. They are also expecting the company to add 5.32 million subscribers, about the same number as last year and slightly above Netflix’s own forecast of 5 million. About 4.35 million of those are expected to come from international markets and 650,000 from the US.
If history is any indication, we may once again see Netflix report strong subscriber numbers today, crushing expectations. This is what happened in 2016, when streaming entertainment giant reported a similar miss in its seasonally weak second quarter, sending shares down by more than 14%, only for the stock to double in value during the following months when subscriptions picked up.
We believe that Netflix’s key driver of growth, its original programming, remains intact both at home and abroad. The company has implemented an aggressive spending program to both create and market new content and the media services company is showing no signs of slowing down. Therefore, we believe that Netflix is in a strong position to surprise investors again today.
According to a survey by the Los Angeles Times in August, Netflix has released 88% more original programming so far this year than it did during the same period in 2017. The report lends credence to Netflix’s own projection that it will spend $8 billion on original programming this year, about 27% more than it did last year.
With subscribers cutting their cable cords en masse, Netflix remains the only viable option to switch to, due both to its low-cost, superior technology and the depth of its content. At this time, we don’t consider the competitive threat from other streaming services to be a real challenge to Netflix.
With the stock at $333, all of the positive catalysts mentioned above create a strong buy-the-dip case for Netflix after its recent pullback.
However, despite our positive predictions for Netflix, it’s important to point out that we see limited upside potential on any positive earnings surprises today. The macro market environment has deteriorated significantly since July.
High growth stocks such as Netflix, which rely heavily on debt to fund their growth, are likely to see a squeeze in their margins as interest rates continue to rise in the US. That headwind, combined with the market volatility, make Netflix stock vulnerable even if it meets, or potentially beats expectations.