Here's What Wall Street Is Looking for in Netflix's Earnings

(Bloomberg) -- After a hot start in 2018, expectations are high for Netflix’s fourth-quarter earnings report due after the market closes. Net subscriber additions continue to be of keen interest to investors, particularly the subscription forecast for the first quarter. While hits like the second season of “Stranger Things” and the film “Bright” are expected to have supported strong subscriber additions in the fourth quarter, Netflix doesn’t yet have a definitive hit to rely on this quarter, Bank of America Merrill Lynch said. Netflix shares added almost 1 percent in pre-market trading Monday after Barron’s speculated over the weekend that Apple may acquire it, adding to a 15 percent gain so far this year.

Here’s what others on Wall Street are saying:

Rosenblatt, Alan Gould

• Anticipated subscription strength in 4Q should be driven by the second season of “Stranger Things,” which “dwarfs” any other shows from Netflix or its competitors, based on Google trends data
• Other expected drivers include operating margin, free cash flow and related investment in film content
• Notes that Netflix has beaten its total subscription forecast in 13 of the past 16 quarters

Goldman Sachs, Heath Terry

• Estimate-beating subscriber additions in 4Q are probably factored into the current stock price
• Average estimates underestimate Netflix’s ability to generate incremental growth in international net subscription additions in 2018 and expand U.S. subscribers through pricing strategies and partnerships like the one with T-Mobile
• Expect 2018 domestic and international revenues and profits to “significantly” top estimates with help from content spending, price increases and “traction in earlier stage markets”

BofA Merrill Lynch, Nat Schindler

• The recent stock gains implies clearly that investors expect Netflix to beat estimates, but we have “little evidence to support it”
• “The best we can point to is some correlation between subscriber growth and the popularity of new original content, which suggests a strong 4Q”
• Investors are probably already factoring in a strong 4Q; the real test and a big driver of stock performance following the earnings release will be the 1Q subscription forecast, particularly for international
• The 1Q content lineup appears to be strong, though it lacks a “definitive hit like ‘Stranger Things 2’ or a blockbuster film like ‘Bright’"

Stifel, Scott Devitt

• In addition to subscriber trends, commentary on operating margin expectations, content spending plans, progress in international markets will be of particular interest
• Recall the price hike in the U.S. and a number of international markets took effect at the beginning of October for new subscribers and during the November billing cycle for existing customers; management did consider some price-hike related churn in its subscriber forecasts

KeyBanc, Andy Hargreaves

• Churn related to domestic price increases should be in line with Netflix’s expectations in 4Q; sees potential for international subscriber growth to exceed estimates due to increased spending on localized content and marketing
• Expects management to maintain forecast for steady margin improvement in coming years
• 2018 operating margin target may be 10%-11%

Cowen, John Blackledge

• Netflix’s 4Q subscriber forecasts are achievable given “increasingly robust content slate,” lack of election-related viewing alternatives present in 4Q 2016, continued strength internationally
• Expects the strong finish in 2017 to carry into 2018

B. Riley FBR, Barton Crockett

• Google searches for Netflix indicate a “surge of interest” by potential subscribers internationally, along with “steady, high interest” in the U.S.
• Correlations suggest Netflix could have gained more than 7 million total net subscribers in 4Q, well above estimates

Bloomberg Intelligence, Geetha Ranganathan and Paul Sweeney

• "Despite toning down 4Q subscriber expectations due to a price hike, strong momentum and an impressive roster of titles may help Netflix beat guidance, especially overseas."
• "Original productions have been powering this virtuous cycle, with 4Q benefiting from the second season of ‘Stranger Things’ and ‘Crown’ apart from the movie ‘Bright.’"
• "While profitability is a focus, U.S. margins may slip on higher marketing costs, even as international margins reach a high. Netflix may spend $8 billion on content in 2018."

Subscriber Estimates

• 4Q domestic streaming net additions 1.29 million (7 estimates compiled by Bloomberg News); company forecast 1.25 million (Oct. 16)
• 4Q international streaming net additions 5.05 million (7 estimates); forecast 5.05 million
  • Total net additions 6.34 million
• 1Q domestic streaming net additions 1.28 million (3 estimates)
• 1Q international streaming net additions 3.90 million (3 estimates)
  • Total net additions 5.18 million

Financial Estimates

• 4Q GAAP EPS estimate 41c (range 38c-44c)
• 4Q revenue estimate $3.28 billion (range $3.18 billion-$3.31 billion)
• 1Q GAAP EPS estimate 55c (range 32c-93c)
• 1Q revenue estimate $3.49 billion (range $3.26 billion-$3.61 billion)

To contact the reporters on this story: Jeran Wittenstein in San Francisco at jwittenstei1@bloomberg.net, Stephen Sweeney in New York at ssweeney39@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Catherine Larkin

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