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Netflix (NFLX), the well-known provider of on-demand internet-based streaming media content, is set to report its Q3 2012 earnings results after the close on October 23 with the accompanying conference call scheduled for 6pm. In this article, I hope to provide a one-stop reference for those looking to position themselves ahead of the upcoming earnings report.

The Recent Run Up - Analyst Upgrades Ahoy!

After bottoming out in the $53 - $54 range, the stock has fairly violently rebounded about 33% to the most recent close of $73.52. This seems due primarily to a couple of high profile analyst upgrades issued over the last several days:

  • On 10/3, Citi (C) reiterated its "buy" rating with a $120 price target due to cheap valuation and improving customer satisfaction metrics
  • On 10/8, Morgan Stanley (MS) upgraded shares to "overweight" and set an $85 price target

Last Quarter's Results - A Recap

The last quarter, analysts were modeling $0.05 earnings per share on $888.9M in revenues. The company beat on the top line, reporting $0.11 per share in earnings, and came in-line on the top line at $889M.

Further, the company guided for continued profitability in Q3 before swinging to a loss in Q4 with a move to the international market.

Compared to the year ago quarter, Netflix had come in at $1.16/share in earnings on $788.6M in revenue, so while sales have improved, margins have been taking a serious beating.

This Quarter's Results - The Expectations

Analysts are modeling earnings per share of $0.04 on revenues of $905M. The range on the revenue side is $899M - $918M and earnings range goes from a $0.07 loss to a $0.14 gain per share. This is down from the $1.16 year-ago period in earnings and $821M in revenues.

For the Q4 guidance, analysts are modeling $942.3M in revenues and a net loss of $0.08 per share, on ranges of $919.3M - $975M and a net loss of $0.35 per share to earnings of $0.11 per share.

Valuation & Competitive Concerns

The most pressing concern here is the sky-high valuation. The company currently trades at 40x earnings and 80x forward earnings, so it is by no means "cheap".

Further, as content costs continue to increase, and as competition from Amazon (AMZN), Comcast XFinity (CMCSA), and Hulu Plus continues to make headway, the business could continue to see razor-thin profitability.

Positives Going Into The Report

Despite shrinking year-over-year earnings, the probability of a Q4 net loss, and the risks to the business model, there are two major positives:

  1. Ramping Subscriber Base - The company has been adding subscribers at a rather nice clip, adding over 25 million subscribers over the last year, representing a six fold increase.
  2. Insider Purchases - There are countless reasons to sell, but only one reason to buy: to make money. Over the last six months, insiders have purchased a net of 349,000 shares in the $71.20 - $85.05 range

Conclusion

With positive analyst coverage, a growing subscriber base, and insider buying, Netflix is racking up a number of positives. However, the stock's reputation as a momentum stock, the fairly high valuation, and increasing competitive pressures serve as nontrivial headwinds.

Source: Netflix's Upcoming Earnings Report - A Preview Of The Main Attraction