Netflix Q3 Earnings Preview: Will the Streaming Giant Rebound From Its Rocky Summer?

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International growth will be vital for Netflix

Wednesday’s third-quarter earnings report comes at a critical time for Netflix, only weeks before deep-pocketed competitors in Disney and Apple enter the streaming battle. The streaming giant and its shareholders have been through a wild 2019. Netflix’s stock, after rocketing up more than 40% during the first half of the year, has dropped 25% since July, when the company reported underwhelming subscriber growth — punctuated by a decline in U.S. subscribers for the first time since it separated its DVD and streaming business in 2011. Despite the growing pressure on Netflix, analysts are cautiously optimistic it’ll hit its internal projections of about 7 million new subscribers. Ampere Analysis research director Richard Broughton said he’s anticipating a “bounce back” quarter from Netflix, thanks to the return of several prominent Netflix originals, including “Stranger Things” and “13 Reasons Why,” during Q3. Netflix announced “Stranger Things” Season 3 set a company record when it was streamed by 40 million accounts in the three days following its early July return. UBS analyst Eric Sheridan, in a note to clients last week, also pointed to Q3’s improved slate compared to Q2, but warned fan sentiment is mixed. UBS data based on Google searches showed “Stranger Things” and “Mindhunter” showed “increased interest” from fans and “Orange Is the New Black” enjoyed a relative boost to prior seasons, while the latest season of “13 Reasons Why” indicated “substantially lower” interest. This might not be a huge concern, though, he added. “Declining interest could be due to the maturity of the shows with the majority of U.S. viewers already familiar with the respective show,” Sheridan said.
Several well-known Netflix Originals returned during Q3, sparking the belief U.S. subscriber growth will rebound from Q2. But UBS data indicates some shows are not as anticipated as they once were (via UBS)
Avoiding a second-straight dip in U.S. subscribers is essential, if only to reassure investors that Netflix’s perch at the top of the streaming mountain is still firmly in tact. Netflix, even after losing about 130,000 domestic subscribers, has 60 million U.S. customers — or more than double Hulu and Amazon Prime Video in the states. Netflix also will be another quarter removed from price hikes that went into effect earlier this year, something the company blamed for its underwhelming Q2 performance. Both analysts agreed international growth will be vital for Netflix. In the last year, Netflix has added six times as many international customers as it has in the U.S. Netflix already sits on 151 million global customers  — more than any other streaming company — heading into Wednesday; extending its lead now becomes the priority as new competitors line up. “Netflix has already reached [about] half of U.S. households, so it’s reaching – realistically – a saturation point. But most international markets are still significantly under-penetrated in comparison, which offers substantial future growth opportunity,” Broughton added. Local productions now play an integral part in Netflix’s international push. Sheridan noted the second season of “Sacred Games” in India and the third season of “La Casa de Pael” in Spain, both returning shows during Q3, spurred increased interest for Netflix abroad. With the bulk of Netflix’s new subscribers coming from outside the U.S., this bodes well for it reporting better Q3 subscriber growth. Analysts expect Netflix to increase revenue 33% year-over-year to about $5.25 billion — a figure it should exceed if it reaches its subscriber projections. Netflix could certainly use a good quarter. Missing on subscriber projections, coupled with the debut of Disney+ and Apple TV+ next month, could push the company from its current $285 share price to below its $267 price at the beginning of the year. Investors will be looking for CEO Reed Hastings or Chief Content Officer Ted Sarandos to say something about how it plans to counter these new competitors on Wednesday. But Goldman Sachs analyst Heath Terry, in a note to clients last week, said Netflix’s best counter-punch is already in place: a strong lineup of Q4 releases. High-profile movies like Vince Gilligan’s “El Camino” and Martin Scorsese’s mafia epic “The Irishman” hit the service this quarter, along with a number of popular shows like “Peaky Blinders,” “The Crown” and “The Kominsky Method” coming back. Expect Netflix to mention this in its letter to shareholders and investor call on Wednesday. That should give Netflix enough ammo to fight off subscriber churn — or customers that were looking to temporarily ditch their service for Disney or Apple — at least through the end of the year, according to Terry. “There is some risk that access to Disney’s back-catalog and high brand value of Disney’s [intellectual property] (i.e. ‘Star Wars’/’Mandalorian’) will drive some initial pressure for Netflix, though we believe Netflix’s original content releases around the launch will offset any meaningful near-term impact,” Terry said. Of course, Netflix’s array of content comes at a cost. Investors will want to keep an eye on how much the company has spent, as Netflix had already racked up more than $6 billion in content costs through the second quarter. Netflix likely won’t raise prices again until mid-2020 on its customers, so to offset its growing content spend, it has to keep the subscribers flooding in. If Netflix can top its projection of 7 million new subscribers, investors will look the other way as content costs balloon.