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Netflix, Inc. (NASDAQ:NFLX) Gets Ready to Rock or Be Rocked

Netflix, Inc. (NASDAQ:NFLX) will report third quarter results in a Letter to Shareholders on its website soon after the bell today. We will take a look at the company’s results tomorrow in a follow-up piece. The earnings interview with management including Chief Executive Reed Hastings will get underway at around 6 PM ET.

Last quarter was a brick off the side of the rim. Netflix missed on its critical subscriber forecast data and guided third quarter numbers down below where analysts had set expectations in EPS, revenues and subscribers. All of this comes in the context of the stock’s hellacious run higher over so far this year.

Netflix, Inc. (NASDAQ:NFLX) shares were up well over 100% ytd into that last report. In other words, last quarter, the miss was a complete surprise. This quarter, understandably, sentiment is a bit more mixed.

While that may reflect reality, it also opens up the potential for a big upside reaction if the skepticism baked in now has overshot in terms of doubts about the growth curve here.


What to Watch

If there is a clear theme, it’s likely this: Investors are largely looking for Netflix to get back on its impressive track, or, failing that, to indicate some positive shift in trends.

The last time we had this much doubt piled into the tape for Netflix was back in the second quarter of 2016 and the first quarter of 2017, when the company posted some disappointing subscriber numbers.

What happened then? The company came through and the dominant growth curve fully reestablished itself. The stock then took off and rallied over 200% higher in the following couple years.

One issure here was identified by management in its last call: subscriber metrics are not very easy to predict.

And a big wild card here is going to be about international traction. The US market is no longer low hanging fruit. But the entire rest of the world may be. The degree to which the data and analysis shows the company is seeing more traction in international markets may determine how the dust settlles in terms of share prices by the end of the week.

As far as guidance coming in: Netflix has guided for third quarter EPS of $0.68 (vs. $0.29 last year) with an operating margin of 10.5% (+350 basis points Y/Y) and revenue up 34% to $3.99 billion.

Netflix also guided for 5.0 million global net subscriber additions (650K in the US and 4.35 million for the international segment) vs. 5.3 million in the year ago quarter.

Last quarter, Netflix guided fiscal 2018 operating margin to the low end of its 10-11% prior forecast, but reaffirmed expectations for steady growth in operating leverage in 2019 and beyond with free cash flow burn of $3-4 billion this year.

As this point, expectations are for ~7.5 million net subscriber additions in Q4.

The other important issue here is about the rest of the market. If the stock suffers another hit, it may add up to further curtailing of high-growth exposure among larger fund managers who start to see the writing on the wall in signaling a larger correction. Like it or not, NFLX has become a bellweather stock in the FANG group.

So, there’s a lot at stake.

The two sides of the coin coming into the report today boil down to this: On the one hand, NFLX faces increasing competition (Google, Hulu, Disney, Amazon, and others are all gunning for the same market). And the stock is still – even after its correction – trading at 75x EBITDA.

On the other hand, the international market is a giant bowl of low-hanging fruit, and the company can easily raise prices with subscribers for the US market without making much of a dent in its data.

So, bottom line: we may see another hiccup here, but the long-term upcycle for the company is anything but exhausted.

The options market implies a ~10% move in the stock this week, so there should be plenty of opportunties for traders.

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