Grab your popcorn and get comfortable, because streaming giant Netflix (NFLX 1.74%) is scheduled to release its third-quarter report on Oct. 16. With so many new competitors poised to enter the market, investors on-board the meteoric rise of Netflix have a lot to be anxious about. I recently addressed some significant concerns for the streaming company. With this upcoming earnings release, we should be able to get some answers to the questions on investors' minds.
Let's take a look at a few key points to get you ready for a Netflix release bigger than Stranger Things or House of Cards.
IMAGE SOURCE: GETTY IMAGES.
Setting the stage
While there are plenty of facts and figures to pay attention to with an earnings release, there is one question in particular that I am most interested in when it comes to Netflix: Has Netflix been able to get back on track with subscriber growth, both domestically and overall?
In the second quarter, Netflix posted a quarter-to-quarter loss of 126,000 U.S. subscribers, a result unheard of since 2011. In the company's letter to shareholders, it predicted a return to "more typical growth" in the third quarter, which it said it had already seen in the first few weeks of Q3. The forecast from Netflix called for 800,000 net new subscribers in the U.S. market in the quarter that just closed. Anything less than that, or a number with a negative sign in front of it, is not going to get the audience on its feet.
For the second quarter, Netflix had forecast an increase of 5 million paid subscribers across the globe, but missed that mark by 2.3 million. For Q3, the company has predicted an increase in total paid subscribers of 7 million. If correct, this would reflect an increase of 14.75% from the 6.1 million added in Q3 of last year. Will Netflix get there? We'll find out later this week.
For now, let's take a look at what happened in 2018.
In Q2 of 2018, Netflix missed the company's global subscriber forecast by 1 million subscribers. What came next? It put up record-setting numbers in Q3. Netflix added 7 million new subscribers, 2 million more than the forecast and a Q3 record for the company.
While this could be a positive sign of company resiliency and give hope for the Q3 report coming out this week, it's possible the company downplayed its Q3 forecast last year to make a big splash following a weak Q2. That was the second time in three years the company missed Q2 and followed up by beating internal expectation in Q3.
Something else I'll be watching
How Netflix did with subscribers in the third quarter is important, but the game is changing in the fourth quarter, and that is why I'll be watching to see what Netflix is predicting for the year's final quarter. It can't be ignored that two new major competitors with deep pockets are entering the streaming market next month. Disney's Disney+ will launch sometime in November and Apple's Apple TV+ is set to launch on Nov. 1. While the competition is certainly not good for Netflix, I'm interested to see the impact Netflix thinks it will have.
Netflix's forecast for paid subscriber growth in the fourth quarter of 2018 was 7.6 million. How Netflix's outlook for this year's fourth quarter stacks up against that number will be telling. If it projects paid membership growth on pace with past years, it will be clear it's not concerned with the competition entering the market. If we see lower growth projections, we'll know it expects a fight. The degree of how much lower will tell how rough Netflix expects that fight to be. Q4 projections increased 2.27% in 2016, 13.33% in 2017, and 49.02% in 2018, all year over year.
| Year | Netflix forecast for Q4 paid membership additions |
|---|---|
| 2015 | 4.4 million |
| 2016 | 4.5 million |
| 2017 | 5.1 million |
| 2018 | 7.6 million |
| 2019 | ? |
DATA SOURCE NETFLIX.
The company has consistently projected year-over-year growth in Q4. Will that come to a halt this year as it eyes new competition? Does Netflix believe streaming is a zero-sum game or will customers be willing to pay for multiple services? Find out in the next episode of the Netflix earnings report.
