Anticipation builds, pushing stock up, ahead of Netflix’s earnings report

Investors hope that a barrage of new shows from the media company will push more subscribers to the service, despite a price hike.

Jessica Henwick and Finn Jones in Marvel's The Defenders. Investors hope shows like The Defenders will keep Netflix subscribers, despite a U.S. price hike.
Jessica Henwick and Finn Jones in Marvel's The Defenders. Investors hope shows like The Defenders will keep Netflix subscribers, despite a U.S. price hike.  (Sarah Shatz/Netflix / Tribune News Service)  

Los Angeles—It’s all about new subscribers at Netflix Inc. — whether the company meets or misses forecasts for third-quarter customer gains, and whether the outlook is positive enough to keep investors upbeat.

The dominant paid streaming company reports financial results Monday after markets close, and anticipation has been building for a bang-up quarter. Since late September, analysts have been raising their price targets for the stock, which already is up 61 per cent this year to a record $199.49 (U.S.). A rush of upgrades came after Netflix announced a price increase in the U.S. and U.K. on Oct. 5.

Read more: Netflix hikes prices in Canada

Investors are confident that customers love Netflix’s constant barrage of new shows so much that they’re willing to absorb the price hike, which was 10 per cent for the most popular subscription option. The third quarter featured the debut of superhero series Marvel’s The Defenders and a new season of drug-trafficking saga Narcos, among other programs.

The company is one of the few in media “with this amount of pricing power,” Rosenblatt Securities analyst Alan Gould wrote on Oct. 6. Goldman Sachs has the highest price target, at $235.

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Subscriber outlook

Subscriber momentum continued into the third quarter and should grow year over year in most markets, said UBS analyst Doug Mitchelson, who raised his price target on the stock by 18 per cent to $225 on Oct. 4, the day before the company unveiled the price increase.

He’s forecasting U.S. customers will increase by 850,000, about 100,000 more than Los Gatos, Calif.-based Netflix projected in July, which would bring the company’s U.S. total to 52.8 million. A tie-in with T-Mobile US Inc., giving wireless users a free subscription, is adding to the gains.

As Netflix’s domestic base grows, big increases are getting harder to come by and the price hike could slow fourth-quarter gains. JPMorgan analyst Doug Anmuth lowered his estimate for fourth-quarter U.S. subscriber growth by 50,000 to 1.65 million on Oct. 13, suggesting people dropping the service because of the higher price could counter gains tied to the T-Mobile promotion. He projects fourth-quarter international subscription gains will reach five million, down from an earlier estimate of 5.2 million.

Profitability

For the third quarter, the company forecasts a $576-million profit from its domestic streaming operation and $30 million from international. Revenue should rise 30 per cent to $2.97 billion, Netflix predicted in July, with earnings soaring to 32 cents a share from 12 cents a year ago.

To buy programming, you need cash, and Netflix is still burning through it at a fast pace, even though the company promised to begin generating substantial profit after completing its global rollout.

Read more: Netflix to spend $500 million to produce Canadian content

Netflix forecasts negative cash flow of as much as $2.5 billion in 2017, with more losses coming in the years ahead, and has raised even more than that over the past year with a $1-billion U.S.-bond sale last October, a $1.4-billion eurobond sale in April and a deal in July for a $500-million credit line.

Led by co-founder and chief executive officer Reed Hastings, the company often uses its quarterly letter to shareholders to outline its financing plans.

With cash and short-term investments at $2.16 billion last quarter, the highest since the end of 2015, the company looks set for the time being.

Programming budget

Subscriber growth at Netflix hinges on having more for shows to watch and, with the company now operating worldwide, it means having more in more countries. In 2018, Netflix plans to spend $7 billion acquiring TV shows and movies, a 17-per-cent increase over 2017, with a growing share dedicated to exclusives and original productions.

The company’s long-term budget for programming has risen by almost 20 per cent over the past year to $15.7 billion at the end of the second quarter, with executives pledging no let-up.

With an ever larger subscriber base, “we can pay more for a piece of content or we can put more on the screen,” chief financial officer David Wells said at a Goldman Sachs conference in September.

Some of the biggest swings in Netflix shares follow quarterly earnings reports. They rose 14 per cent on July 18 and jumped 19 per cent in one day a year ago, both times because subscriber growth topped forecasts.

Disappointments can be just as wicked and the last big one came in July 2016, when a price hike crimped subscriber growth and the stock plunged 13 per cent.

So best to buckle up.

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