Why I Care About Earnings in Tonight's Netflix Report

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We Netflix (Nasdaq: NFLX  ) investors saw our shares jumping through the ceiling three months ago as the beleaguered digital video guru reported a return to subscriber growth. The stock was left bruised and battered (smells like tempura) in 2011, and shareholders could certainly use a fresh shot of confidence.

Since then, shares have meandered and lost about 9% of their earnings-powered value. Will tonight's first-quarter report prove the doubters right?

The average analyst expects Netflix to post a $0.27 loss per share on sales of about $869 million. The revenue target is above the midpoint of management's own guidance range from $842 million-$877 million. On the bottom line, Netflix expects global losses in a range between $0.16 and $0.49 per share. We should see "modest quarterly losses" until the heavy investment in streaming services across South America and the British Isles starts to pay off.

Keep in mind that Netflix typically underestimates its own streaming subscriber growth and that every unexpected streaming subscriber is basically found money. Other than the variable advertising and marketing budgets, Netflix set its operating costs for the quarter long ago by nailing down firm content license deals, and the actual service costs almost nothing to run.

Against that backdrop, I wouldn't be surprised at all if those expected quarterly losses never show up in the first place. But nobody ever got fired or sued for publishing a conservative estimate, right?

The only reason to worry about earnings at all is the commitment to turn profitable before exploring further international expansion. Sitting on your hands is a bad idea when (Nasdaq: AMZN  ) is buying and nurturing digital video specialists abroad. Cable and satellite companies in Europe and Asia could also put a crimp in Netflix's plans for rapid global domination by establishing their own low-cost subscription services first. So yeah, I'd like to see a profit sooner rather than later, if only to release CEO Reed Hastings from that unfortunate promise.

Other than that, the real meat lies in subscriber counts and the rapid shift from DVD mailers to online video streams. It won't be long until the DVD revenues drop too low to stay profitable against their very large overhead costs. I wouldn't mind at all if Coinstar (Nasdaq: CSTR  ) wanted to buy that division to bundle it with its ubiquitous Redbox kiosks. The envelope color already fits, so to speak, and Netflix could use the cash infusion to restart the international expansion even sooner -- and with a bigger budget.

Netflix is an American icon that's set to become a global giant. Our home-grown business heroes love to dominate emerging markets -- will Netflix be the next worldwide empire starting in the U.S. of A?

Fool contributor Anders Bylund owns shares in Netflix but holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Motley Fool newsletter services have recommended buying shares of Coinstar, Netflix, and The Motley Fool has a disclosure policy. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 23, 2012, at 5:20 PM, sikiliza wrote:

    Netflix today reminds me of that scene from Juwanna Mann where the ball player strips in front of the crowd and yells, "how do you like me now!!!?"

    Netflix: How do you like me now?

    Whitney Tilson: I'm gonna get you baby!

    Netflix: That's twice in a row now, sweetheart. Both long and short.

    Whitney Tilson: I will go for a straddle this time round.

  • Report this Comment On April 23, 2012, at 5:31 PM, wrongdog wrote:

    Juwanna Mann?

  • Report this Comment On April 23, 2012, at 9:24 PM, johnny2406 wrote:

    I posted two days ago a question to The Motley Fool after series of articles sponsored by Fool's why after so evident failure of NFLX The Motley Fool is still trying to lure in their members to buy the stock. Anything for great stock to great investment members were deliberately drawn into this sinking ship. Now I wonder how all the members feel about The Motley Fool advice?

    Why there was no articles from Fool's today? Do you still preach that NFLX is going to take over the world?

    I am not the column writer and I can say it again, not in this century.

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