As Netflix (NASDAQ:NFLX) reports its Q3 2011 earnings on Monday, investors and analysts will keep a keen eye on the outlook that company provides. Netflix’s stock has stumbled in recent months, and the company has faced subscriber backlash over its decisions to raise prices and re-brand DVD business; although Netflix reversed the latter decision. Meanwhile, Amazon (NASDAQ:AMZN) and Dish Network’s (NASDAQ:DISH) Blockbuster have been utilizing this window of opportunity to expand their services. Netflix is at a delicate point, and the upcoming earnings announcement could be one of the most important earnings release events for the company so far. Below we discuss certain key aspects to watch out for.
Our price estimate for Netflix stands at $195, implying a premium of about 75% to the market price.
Domestic Subscriber Growth Outlook for Q4
The company revised its guidance in September and for the first time in many quarters, it expects to experience net subscriber loss in Q3 2011. The reason is not hidden to anyone. The company has faced severe backlash from its customers over decision to raise prices and re-brand DVD business to Qwikster. Although the company reversed its decision to re-brand, the damage for Q3 was already done and the effect could percolate to Q4 as well. We expect flat to mild growth in Q4, and it will be interesting to see what the company has to say about its subscriber outlook. Subscriber growth is the single most critical factor that drives Netflix’s stock.
It’s not that customers are simply turning away from Netflix in frustration. The efforts from rivals are making it a little bit easier for them to do so. Although we believe that other streaming services have a long way to go in order to seriously pose threat to Netflix, they are likely to get great deal of help in this process if Netflix does any more blunders.
Update On International Prospects
We believe that the market is not really giving credit to long-term prospects that Netflix has in international market. According to our estimates, this alone contributes about 30% to the company’s stock. It will be important for investors to look out for international subscriber growth, and whether Netflix is facing any issues in its Latin American endeavor.
Lets Watch Where Content Costs Are Heading
Last, but not the least, it is important to watch out for where content costs are heading. In our pricing model, we already incorporate significant increase in streaming related content acquisition costs. However these are likely to be accompanied by decline in DVD related costs. Nevertheless there is a slight chance that company may need to spend more than we expect in order to repair its damaged image and fight off competition in future.