Subscriber gains and guidance for the remaining year as well as new content deals will be the focus when online streaming giant Netflix (NASDAQ:NFLX) reports its Q2 2012 earnings tomorrow. Several analysts are pessimistic about the company’s ability to live up to its full-year subscriber guidance. However, we feel differently and believe that Netflix has shown signs of recovery and could very well improve its presence in the U.S. and International markets. Here are a few things to watch.
Netflix’s stock has performed dismally since the company reported its last quarterly results. Then recently the stock surged when the company said that it streamed more than 1 billion hours in the month of June, 2012. This was a significant improvement if we compare it to Q4 2011 when Netflix streamed, on an average, less than 700 million hours per month. 
With this indication and other clues concerning adoption of streaming, we expect Netflix to post positive subscriber gains in the upcoming earnings release, continuing the momentum that it built in Q1 2012. In fact, we believe that the ratings decline of Viacom (NASDAQ:VIA) Nickelodeon indicates that kids are spending more time on other entertainment resources, online streaming being one of them.
U.S. subscriber gains will continue to remain the focus given that U.S. is likely to remain Netflix’s largest geography for foreseeable future. Nevertheless investors should not underestimate international growth. It might be easy for some to overlook developments in the international arena, but it holds significant long-term value add potential as close to 30% of our fair value estimate for Netflix comes from future growth in the international markets.
Just like subscriber growth, the cost of content acquisition remains an evergreen and important metric of Netflix’s profitability. Lately, the company has been running into losses primarily due to content investment for international expansion. Netflix has significant content obligations on its balance sheet. However, these must be viewed concurrently with future growth potential. It will be interesting to note how the company’s margins have changed over the last quarter.
Effect of Increased Competition
Although in general we remain positive about Netflix, the increasing competition poses some risk. Not much has changed as far as Netflix’s own strategy is concerned. The company continues to enhance its streaming library, add more exclusive content and expand overseas with intermediate enhancements to its UI. However competition has increased and several big names are getting more interested in streaming. Netflix still has the lead, but risk exists. We feel that the impact of competition may be more evident in later half of this year.
Our price estimate for Netflix stands at $110, implying a premium of more than 35% to the market price.Notes:
- Netflix Gains as Online Viewing Surges: San Francisco Mover, Bloomberg, July 3 2012 [↩]