What To Expect From Netflix’s Q3

by Trefis Team
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Netflix (NASDAQ: NFLX) is scheduled to announce its third quarter results on Tuesday, October 16. The streaming giant has over 130 million paying subscribers in over 190 countries along with a vast range of TV shows and movies, including original series, documentaries and feature films. In the first half of 2018, the company’s revenues increased 40% year-over-year (y-o-y) to $7.6 billion, largely driven by growth in subscribers across both the U.S. and international streaming markets.

Netflix saw its stock gain nearly 50% in 2017 and is already up around 70% year-to-date. We have maintained a $370 price estimate for Netflix’s stock, which is 10% ahead of the current market price. We have created an interactive dashboard on what to expect from Netflix’s Q3, which outlines our forecasts for the company. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation.

Streaming Forecasts In Q3

Netflix missed subscriber estimates in its Q2 earnings, which was a concern considering the competitive threat that will come next year with the launch of Disney’s streaming service. In addition, the company also guided for a lower net subscriber expectation in Q3 – 5 million global net additions (650K in the U.S. and 4.35 million for the international segment), which is fairly conservative as compared to a 5.9 million consensus estimate. That being the case, investors will be closely watching the upcoming Q3 report for the net subscriber figures.

We expect Netflix’s subscriber growth to gain momentum in 2018, driven by the fact that the company is spending a significant portion of its content budget on original shows. The company has a long-term goal of ensuring that nearly 50% of the content streamed on its platform is original. Netflix plans to spend as much as $13 billion on shows and movies in 2018, up from $6 billion earmarked for content in 2017, which should drive subscriber growth but will weigh on margins. We expect Netflix to benefit from healthy subscriber growth, which should lead to improved cash flows and can, in turn, allow the company to invest further in content.

We forecast Netflix to reach 58 million subscribers in the U.S. with an average monthly fee per subscriber of $11, translating into $1.9 billion in domestic streaming revenues for Q3. In addition, we also estimate close to 77 million subscribers in international markets with an average monthly fee per subscriber of $8.50, translating into about $2 billion in international streaming revenues in the same period. Netflix has been growing its subscribers by leveraging its original content slate, and we expect this trend to continue in the near term as well. On the other hand, Netflix’s DVD business is expected to continue to lose steam, and its revenues will likely decline to just below $90 million. Overall, we expect the company to report revenues of around $4 billion, based on strong adoption in international markets. Furthermore, we anticipate that the total subscriber base for both international and U.S. streaming services could grow to over 135 million during the quarter.

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