Investors have conflicting opinions heading into the Netflix's (NASDAQ:NFLX) fourth-quarter earnings report. On the negative side, the video-streaming giant has missed management's growth targets for two consecutive quarters and more disappointments could be driven by new competition from Disney and Apple. On the other hand, Netflix's global growth opportunity is huge, and so is the potential for surging profits as membership pricing rises.
That conflict sets up a big week for shareholders ahead, so let's look at how the business might perform relative to expectations on Tuesday, Jan. 21.
Following the beat
Membership trends so far in 2019 have been a mixed bag. Subscriber gains are underperforming in the massive U.S. segment but have been surging in places like Latin America, Europe, and Asia, which collectively have a larger addressable market. Netflix added just 500,000 users at home last quarter but gained 6.3 million in other markets. That 23% international increase allowed growth to land at 6.77 million compared to 6.1 million a year earlier, protecting the company's five-year track record of expanding its global base at an accelerating clip.
Netflix's fourth-quarter projection calls for that streak to end this week, though, as global additions fall to 7.6 million from 8.8 million. The forecast implies full-year growth of 26.7 million for a slight slowdown from the prior year's 28.6 million user surge. Still, its an impressive feat to add nearly 30 million paid members for yet another year.
Much of Netflix's growth slowdown can be pinned on its last two domestic price increases, which have pushed average prices to over $13 for U.S. streamers. There are many positive financial implications from that move, though, including the likelihood for surging revenue. Netflix is predicting a 30% sales increase in Q4, which would surpass the prior-year's growth even though the member addition rate is slowing significantly.
The tech giant is predicting another period of negative cash flow, with free cash declining by $551 million in the fourth quarter. However, higher average prices on a user base that's approaching 170 million could quickly start erasing the cash flow problem that's been pressuring the business for years.
Big questions going forward
Assuming no major deviations from the financial projections CEO Reed Hastings and his team issued back in October, the big news this week will center on Netflix's view of the competitive landscape. Last quarter, executives warned that the launch of new services from Disney and others would add noise and some slight headwinds to growth.
The company has faced down streaming rivals in the past, including Amazon.com's Prime Video. But the launches in late 2019 marked an unusually active period in the industry. With a few weeks of subscriber trends to crunch and compare against markets that didn't feature those additions, executives on Tuesday will have a better idea about whether these new rivals will pressure subscriber growth or pricing.
Finally, look for Netflix to issue a new growth outlook that begins to answer the question about whether subscriber gains will keep slowing into 2020, or will stay strong as U.S. TV fans get used to the higher pricing.
Management has been saying that the fee increase reflects increased spending on the quality and quantity of its original content, and Netflix's strong performance at this year's Oscar nominations confirm that critics are on board with that reading. We'll find out on Tuesday whether TV streamers, the ultimate judges, also agree.