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Netflix (NFLX) to Report Q3 Earnings: What’s in the Cards?

Zacks

Netflix Inc. NFLX is set to report third-quarter 2017 results on Oct 16. The company has beaten the Zack Consensus Estimate thrice and missed it once in the past four quarters, delivering an average positive surprise of 28.6%.

Last quarter, the company reported earnings of 15 cents per share, which missed the Zacks Consensus Estimate of 16 cents. However, revenues increased 32.3% year over year to $2.786 billion and beat the consensus estimate of $2.761 billion. Subscriber growth primarily helped Netflix generate significant revenues.

Notably, shares of Netflix have gained 57.5% year to date, significantly outperforming the industry’s 12.6% rally.


Let’s see how things are shaping up for this announcement.

Factors to Consider

Netflix has been drawing strength from its growing portfolio of original content. The company has also been ramping up its efforts to boost regional programming. This is expected to expand its international presence as the domestic market approaches saturation.

We believe the strength of its content portfolio will drive subscriber growth across the globe. Notably, apart from North America, the company has been doing really well in Latin America and Europe. Netflix is doing considerably well in India and Japan as well and has a lot of room for expansion in other Asian markets.

The company’s growing subscriber base is indicative of the fact that audiences are happy with its content. This is further evident from the latest survey conducted by RBC Capital Markets lead Internet analyst Mark Mahaney. Per the survey, 36% of Netflix’s surveyed subscribers mentioned that “Netflix's content is improving over its already strong position.”

Additionally, 67% of subscribers said that they were "extremely" or "very" satisfied with Netflix. In July, the company announced that it has 104 million subscribers globally. The company expects to have added 3.65 million subscribers in the international segment and 0.75 million subscribers in the domestic streaming segment in third-quarter 2017.

Recently, Netflix won 20 Emmy Awards out of the 91 categories that it was nominated in, compared with nine awards and 54 nominations last year. The award wins reflect the growing popularity of Netflix’s original content. The acquisition of comic book publisher Millarworld in August will further help the company to improvise on its contents.

However, investors need to watch out for high costs that accompany rapid international expansion and production of original content. The whopping budget of $6 million to be spent on original content this year might weigh on the bottom line. Also, stringent competition from established players like Amazon AMZN Prime, Hulu and Time Warner’s HBO is a major headwind.

Netflix, Inc. Price and EPS Surprise

Netflix, Inc. Price and EPS Surprise | Netflix, Inc. Quote

Earnings Whispers

Our proven model does not conclusively show that Netflix is likely to deliver a positive surprise this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Netflix’s Earnings ESP is -0.02%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Netflix’s Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are a couple of companies that you may want to consider as our model shows that these have the right combination of elements to deliver an earnings beat in their upcoming release:

Applied Materials AMAT with an Earnings ESP of +0.37% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kemet Corporation KEM with an Earnings ESP of +7.46% and a Zacks Rank #1.

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