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Netflix (NASDAQ:NFLX) is scheduled to report 4Q10 results on Wednesday, January 26. The Street is estimating revenues of $600 million, GAAP EPS of $0.71, and gross margins of 35.5%. Gross subscribers are projected to be 5 million to end the year with 20 million subscribers, churn of 3.7%, SAC of $16.50, and APRU of $11.65.

Netflix has consistently outperformed on the subscriber metrics, and the stock has responded meaningfully after several earnings results over the past few years. However, at a PE near 50x, a beat would have to be meaningful in order for the shares to react. However, we note that management has been quite bullish on recent investor conference calls with the CEO calling for shorts to cover their positions.

Traffic to the site has been robust, growing 40% year-over-year in the fourth quarter and faster than Hulu.com, which only grew 10%. Thus the site continues to draw an immense amount of traffic although most analysts believe the correlation between site traffic and subscriber additions is weak.

Netflix continues to benefit from the Blockbuster (BBI) and Movie Gallery (OTC:MVGRQ) closings and strong penetration in devices. In addition, its streaming service has resonated well with consumers, with a majority of subscribers choosing the streaming service over DVD rentals. The service has the added benefit of lowering DVD distribution costs, which allows management to spend more on streaming content relationships.

Questions for management on the call:

  1. How many subscribers does NFLX have in Canada?
  2. How does the company plan to fend off competition from Amazon.com (NASDAQ:AMZN) in Europe, and does it believe Amazon.com will compete in the U.S.?
  3. How much share repurchase is it conducting at these price levels?
  4. How is it managing the cost of the new content relationships, and how does it view those costs trending in the future?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Netflix 4Q10 Preview

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