For the last three months, Netflix shares have been absolutely boffo.
Aided by strong third-quarter financial results, and high hopes for the company’s new ad-supported subscription tier, the stock has rallied 35% since the day before its last earnings report, a period in which the Nasdaq Composite has advanced 2%.
That rally has set a high bar for the company’s fourth-quarter results, which are due after the close of trading Thursday. Netflix (ticker: NFLX) has projected revenue of $7.8 billion, up about 1% from a year ago, with profits of 36 cents a share. Netflix projects 4.5 million net new subscribers in the quarter, which would bring the total to about 226 million. Street consensus estimates put revenue at $7.9 billion, with profits of 55 cents a share, and 4.6 million net adds.
In any previous Netflix quarter, the key metric would be guidance on net new subscriber growth for the coming quarter. But last time around, the company announced a decision to stop providing data on subscriber growth. It will give subscriber numbers for the fourth quarter but nothing after that.
Given new initiatives around both advertising and a crackdown on password sharing, the view at Netflix is that revenue growth will be a better growth measure from here rather than subscriber growth. Meanwhile, the research firm YipitData asserts that the subscriber growth figure for Q4 will come in well above consensus levels, driven by a strong content slate and reduced subscriber churn.
Current Street estimates for the March quarter call for revenue of $8.1 billion, profits of $2.99 a share, and the addition of 2.6 million net new subscribers. I suspect that even without any help from Netflix on the actual pace of subscriber growth, Street analysts will continue to include the figure in their models.
Last time around, Netflix had warned that December quarter results could be reduced by about $1 billion by the strong U.S. dollar, but the dollar rally has since moderated. Analysts think the actual hit will be smaller, which could lead to stronger-than-expected revenue growth in the period.
Investors will be looking for updates on both the progress of the company’s advertising program and the nascent push to reduce password sharing. Last quarter, Netflix said it expected only a modest contribution from advertising in the December quarter.
Wells Fargo analyst Steven Cahall estimates that the company added 4.8 million net new subscribers in the December quarter, but he thinks buy side expectations appear to be in the 5 million to 5.5 million zone, and that any number below 5 million could be viewed as a miss. Cahall also contends that progress on password sharing, rather than advertising, could be the biggest catalyst for Netflix shares in the short run. He maintains an Overweight rating and $400 target on the stock.
Oppenheimer analyst Jason Helfstein likewise keeps his Outperform rating and $400 target price on the stock ahead of earnings. His view is that the stock offers an attractive risk/reward profile, thanks to a combination of the new moves on advertising and password sharing, and slower content spending by rivals.