If Netflix (NFLX 1.74%) has a "Tudum" moment in the works, this would be a great week to pull it off. The world's leading premium video streaming service announces fresh financials after Tuesday's market close. A lot is riding on the third-quarter performance, and the only near-certainty here is that the stock will be on the move one way or another this week.
Netflix was forecasting a return to sequential subscriber growth for the quarter back in July. There's also growing buzz within the analyst community about the new ad-supported tier that it will roll out in two weeks. Wall Street's warming up to Netflix again. The stock is up more than 40% since its springtime low, but it's naturally well below the all-time highs it hit late last year.
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There's always something good on TV
Guidance offered by Netflix this summer calls for $7.8 billion in revenue for the three months ending in September. This is a rare sequential dip in revenue. The 5% year-over-year increase is the weakest showing in Netflix's more than 20 years of public trading, stealing the unfortunate crown form the 7% top-line uptick it posted in the first quarter of 2008.
This will be the third consecutive quarter of single-digit revenue growth. It will be the sixth consecutive period of decelerating top-line growth. Netflix also sees its profit and operating margin contracting. One piece of comforting news is that it's targeting 221.67 million global streaming paid memberships, a million more than it had on its books at the end of June. After back-to-back quarters of sequential declines in total subscribers, this should ease concerns that Netflix peaked last year.
Guidance isn't written in permanent ink. Netflix provided the outlook just three weeks into the new quarter. A lot can change, and Netflix has proven mortal in aiming too high more often than usual lately.
Here's where the ad-supported monthly plan that's launching in the U.S. on Nov. 3 comes in. It wasn't weak content that led to the platform's popularity shrinking through the first half of this year. Netflix has had several hit shows and movies debut on its service this year. A plethora of rival services and a poorly received price hike have made retention and growth challenging. This ad-backed offering -- at an aggressive price point of $6.99 a month -- should keep a lot of potential defectors close to the perpetually expanding content catalog of Netflix.
It will also bring a new revenue stream for Netflix, opening the door to what should be lucrative ad rates paid by marketers that have been denied access to the Netflix audience in the past. There will always be the risk that the new cheaper plan cuts into the attractiveness of its pricier ad-free offerings, but the arrival of advertising revenue as an incremental source of business will help ease that sting. UBS analyst John Hodulik bumped his price target on the shares from $198 to $250 late last week, an encouraging sight heading into this week's telltale financial update.
Hodulik points out that Netflix management -- in suggesting that the move will be neutral to positive compared to the basic ad-free plan at $9.99 a month -- implies that ad revenue per user will meet or exceed the $3 a month difference. It's a bold projection, but the analyst feels that this could be a conservative forecast from the leader of streaming media stocks. Netflix stock has been rising in recent months, but it's still more than two-thirds below its November peak. It will have to play its cards well this week and beyond to keep the recovery going.
