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13 Reasons Why Netflix Will Have to Bounce Back in Q2

By Rick Munarriz – Apr 18, 2017 at 10:06AM

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Netflix had a mixed first quarter, but it can't afford to be less than perfect in the current period.

Netflix (NFLX 2.37%) reported mixed quarterly results after Monday's market close. We already broke down the pertinent numbers, so now let's take a look at the challenges that await the leading premium streaming platform.

Netflix stock was hitting new highs just ahead of the report. Let's look at some of the things that have to go right in the current quarter for Netflix to keep pushing to new highs.

Kevin Spacey saluting in House of Cards.

Image source: Netflix.

1. Netflix can't miss its subscriber targets again

There were some rumblings about Netflix falling short of its subscriber forecast, and those worrywarts got it right for a change. Netflix was targeting 5.2 million in net streaming subcriber additions during the first three months of the year, 1.5 million domestic and 3.7 million international. It fell slightly short on both fronts with 1.42 million stateside net additions and 3.53 million more users overseas.

Netflix has rarely missed its membership forecasts. The last time it happened was during the second quarter of last year, and the stock got creamed. Netflix recovered nicely, with back-to-back blowout quarters of surpassing its subscriber targets by at least a million. It's going to have to do so again.

2. House of Cards needs to be a hit

Earnings clocked in better than expected, partly because the fifth season of House of Cards moving from the first quarter to the second had a positive effect on boosting operating margin this time around. Obviously, that tailwind will become a headwind for the current quarter, so Netflix better hope that its most iconic show draws a crowd. Falling short on the bottom line and in terms of subscriber count doomed Netflix during the second quarter of last year.

3. Sandler needs to keep working

Netflix had some kind words to say about its Adam Sandler movies. It chose to recently double Sandler's four-movie deal, and the third installment -- Sandy Wexler -- debuted over the weekend. Netflix made it clear why it bet big on an actor whose last few films have been critical duds. Members have spent more than 500 million hours streaming the first two entries. All three movies have fared poorly with critics, but the 33% Rotten Tomatoes score for Sandy Wexler is actually well ahead of the first two entirely. It needs to keep subscribers close.

4. Movies in general need to matter

Netflix praised its Sandler deal, but it was humble enough to call out the mistake it made with Crouching Tiger, Hidden Dragon: Sword of Destiny, a big-budget sequel that failed to resonate with audiences. Movies cost a lot, and Netflix will have to make sure it has a higher hit rate on its pricier flicks.

5. Say "100 million" sooner rather than later

Netflix's goal of 99 million subscribers by the end of March failed to materialize, much less the nice round milestone of 100 million. It's surprising that Netflix didn't announce that it had already crossed that mark until you realize that the second quarter has historically been its worst period for acquiring subs. It's forecasting 3.2 million net additions during the quarter, and it was 1.25 million subs away from 100 million by the end of March. Netflix's subscriber tally should cross into nine figures by early May, and you can be sure that bears will let the market know if it's mid-May and Netflix hasn't issued a press release. 

6 through 10. The streaming TV competition is intensifying

Sling, Playstation Vue, DirecTV Now, YouTube TV and Hulu's upcoming service were five platforms singled out by Netflix on Monday, and therefore the next five reasons to worry. These internet-tethered services are replacing more expensive cable and satellite television packages. The optimist will argue that consumers trading down to $30 to $50 monthly plans leaves more money for Netflix, but the pessimist will counter that as customers begin to binge on those platforms, Netflix won't be as relevant. Netflix is still growing in this climate, but it needs to keep things that way.

11. DVDs can't drag down performance

Netflix now has fewer than 4 million DVD-based subscribers, something that hasn't happened since the third quarter of 2005. This remains a profitable business, but it's also a scalable one where it needs big numbers to make that platform viable. DVD members and DVD contribution profit has fallen by 17% and 16%, respectively, over the past year. 

12. Members can't thumb their noses at thumbs

Netflix recently switched away from its five-star ratings grid, simplifying the process to a thumbs-up or thumbs-down vote. This may make it easier for customers to decide, but switching to a two-point system instead of a five-star range may take some getting used to.  

13. Marketing will need to pay off

There's a lot of money being spent on content, but let's talk about marketing where Netflix is committed to spending $1 billion to promote its service this year. Netflix is turning to programmatic advertising, a new yet promising niche where the ad buys are automated to maximize their effective reach. With nearly 99 million members worldwide, Netflix can afford to spend some serious money on getting the word out about its new content and evolving platform. We'll see how it plays out.

Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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