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Netflix (NFLX) reports Q3 results on October 23rd.

The Street expects:

  • Revenue: $889 million
  • EPS: $0.04 per share
  • Q4 revenue guidance: $907 million

Heading into the earnings, subscriber growth will be the key focus point.

After last year's disastrous (and failed) business split ad price hike, Netflix will unlikely have the power to raise prices. Therefore, revenue growth can only come from subs rather than ARPU.

According to management, Netflix currently targets 28.7million subscribers by year-end. However, I view such a goal to be a bit overly optimistic given that 1) the company only had 23.9 million subscribers at the end of Q2 and achieving the goal requires a subs Q/Q growth of 9.5% and 2) competition from other deep-pocketed platforms such as Amazon (AMZN), Verizon/Redbox (VZ), Dish/Blockbuster (DISH), Comcast and Hulu. I note that, according to comScore data, Netflix's traffic declined 6% y/y in August while rival Blockbuster saw traffic increase 31%, marking it the 10th consecutive month of y/y increase.

While subscriber growth is a critical component of Netflix's growth equation, investors should also not forget about the cost side. Netflix will likely continue to pay up for content to retain/attract subscribers because its aging content library is becoming increasingly less attractive to users when current contents are readily available on various TV networks. Lack of new content will likely cause a rising churn-rate and magnify the downside risk to the shares. To continue purchasing content, Netflix may need additional capital as it raised $200 million in convertible notes last November.

Even with the downside risks Netflix faces, investors should not give up on the shares completely. I note that:

  1. Netflix commands the strongest brand among the VOD platforms
  2. Deepest penetration into living room devices (eg. Smart TV, video game consoles, Apple TV)
  3. Stronger international presence than competing VODs
Source: Netflix Q3 Earnings Preview: Uncertainty Over Subs Growth, Cost Pressure To Persist In The Near-Term