Netflix earnings will be all about subscriber additions, especially overseas

Netflix Inc. is scheduled to report its second-quarter earnings after the close on Monday, and investors will once again zero in on the company’s net subscriber additions, especially those from outside the U.S.

Analysts polled by FactSet expect NetflixNFLX, -4.28%  to add 6.2 million net subscribers in the second quarter of 2018 — 1.20 million in the U.S. and 5.01 million internationally. This is similar to the 1.2 million and 5.9 million Netflix forecast in April.

“The debate from here centers on Netflix’s ability to drive the kind of adoption rate and returns globally it has built in the US,” wrote Morgan Stanley analyst Benjamin Swinburne in a note published Thursday. The company’s “US success points to a greater international opportunity ahead,” he added.

Analysts are turning their sights outside the U.S. for greater gains as Netflix has all but taken over video in the domestic market. U.S. consumers are using Netflix to watch video content more than any other platform, according to a survey of 2,500 people Cowen & Co. published last week.

The streaming service is especially popular with younger viewers — almost 40% of respondents aged 18 to 24 years old said they used Netflix most often to view video content, far ahead of the 23% who said they used Alphabet-owned GOOG, +0.45%GOOGL, +0.26% YouTube, which came in second among young respondents. The survey “highlights the importance of Netflix in the home, particularly among millennials,” wrote Cowen & Co. senior research analyst John Blackledge at the time.

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Cowen & Co. analysts raised their Netflix price target to $430 from $375 last week, based on their prediction the streaming giant’s international user base will grow from 83.6 million at the end of 2018 to 255.2 million subscribers in 2028.

“Netflix has dominated domestically for years. That’s how it has gotten where it has. But naturally, you’re starting to see that domestic opportunity level out,” Daniel Ives, head of technology research at GBH Insights, told MarketWatch.

“International subscribers are front and center,” he said, adding that he sees an opportunity for 700 million international subscribers by 2020.

And if Netflix misses subscriber estimates? Not a huge problem, according to a Friday note by MKM Partners, as a miss could be seen as a buying opportunity.

Netflix “has a history of subscriber choppiness and sometimes comes below guidance,” MKM analysts wrote. “We think there are many more funds looking for buying opportunities and would expect less severe pullbacks when misses occur,” they added.

Here’s what to expect

Earnings: Analysts polled by FactSet are expecting Netflix to post earnings of 79 cents a share, an 81% increase from the second quarter of 2017.

Estimize, which crowdsources estimates from buy-side and sell-side analysts, fund managers, academics and others, is expecting EPS of 81 cents.

Revenue: Analysts polled by FactSet expect revenue of $3.9 billion split almost evenly between domestic and international streaming revenues. Domestic DVD-by-mail revenue is expected to be $93 million. Netflix reported revenue of $2.8 billion in the second quarter of 2017.

Estimize also pegs revenue at $3.9 billion.

Stock movement: Netflix stock has set record high after record high this year, and is now sitting at $418, a gain of 118% in the past year, while the S&P 500 has risen 3.85%. Of the 44 analysts who cover Netflix, 26 rate the stock a buy or equivalent, 15 are neutral and three are at underweight or sell. The average price target is $416.72.

What to look for: Investors should keep an eye on Netflix’s third-quarter plans and any commentary on content spending. Analysts at UBS, led by Eric Sheridan, wrote the firm saw “weakening U.S. consumption trends” for Netflix in the second quarter, based on data from comScore. Sheridan added that second-quarter sequels had underperformed those in prior seasons, most notably “13 Reasons Why” and “Luke Cage,” based on a Google search trends analysis the firm conducted. However, “Netflix does have a very robust Q3 slate already announced (esp. on the movie front)” which could reinvigorate consumption trends, he wrote.

Netflix’s third-quarter roster includes the sixth season of “House of Cards” and the fourth seasons of “Narcos” and “Fuller House.”

Investors should also keep an eye on the streaming giant’s cash burn. Wedbush’s Michael Pachter, one of the few analysts who is bearish on Netflix, wrote on Wednesday of his concerns regarding the company’s continued negative cash flow and increasing debt. “We don’t expect visibility during 2018, and think that another trip to the debt markets, combined with worsening cash burn, could cause Netflix’s share price to deteriorate,” he wrote.

UBS said the streaming giant’s potential long-term growth is already reflected in its current stock price, but the price does not adequately reflect “risks to the downside from competition, free cash flow burn, & dependence on capital markets for content spending goals.” The investment bank downgraded the stock to neutral from buy on Thursday.

However, Morgan Stanley’s Swinburne says the company’s negative cash burn “relative to its positive earnings is a result of the timing differences in producing content and amortizing it,” adding that such negative free cash flow is “directionally consistent with other TV production and distribution businesses such as Time Warner, CBSCBS, -0.19%   and 21st Century Fox FOXA, +0.38%” Time Warner, now called WarnerMedia, is owned by AT&T T, -1.74%

Netflix shares have shot up 116% so far this year, while the S&P 500 SPX, +0.11%  has risen 4.1%.

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