Tonight, we'll get an earnings report from video-rentals-by-mail leader Netflix (NASDAQ:NFLX). Grab your remote and a bag of chips, and we'll take a look at where the company is going next.

What analysts say:

  • Buy, sell, or waffle? Out of 21 Wall Street analysts following Netflix, 10 rate the stock a buy, three advocate a sell, and the other eight are holding. In our Motley Fool CAPS community, some 2,600 investor opinions add up to a two-star stock.
  • Revenues. The Street estimates that sales will come in around $277 million, 46% over the year-ago total.
  • Earnings. The average forecast is looking for $0.15 per share, down from $0.17 a year ago. Just keep in mind that Netflix has beaten the Wall Street consensus in each of its nine latest earnings reports, and sometimes severely so.

What management says:
Management expects to end the year with 6.3 million subscribers, up from 5.5 million at the end of 2005. By comparison, closest rival Blockbuster (NYSE:BBI) was tickled pink with 2 million customers for its online service at the close of 2006. The long-term goal for Netflix is 20% of all U.S. households, or 20 million subscribers, by 2010.

What management does:
The rising gross margins are a testament to the scalability of Netflix's business model -- the more customers you sign up, the less fixed overhead costs take away from revenues. Also, look at those stable free cash flow ratios and put them next to the skyrocketing net sales. This is a money-printing machine in the early stages of operation.

Margins

6/2005

9/2005

12/2005

3/2006

6/2006

9/2006

Gross

31.8%

30.6%

31.9%

33.4%

35.5%

36.7%

Operating

5.6%

3.7%

3.6%

5.1%

6.9%

7.2%

Net

3.6%

1.5%

6.2%

7.3%

8.0%

7.9%

FCF/Revenue

28.8%

24.7%

28.4%

29.0%

27.5%

27.9%


Year-Over-Year Growth

6/2005

9/2005

12/2005

3/2006

6/2006

9/2006

Revenue

59.4%

41.5%

36.3%

36.4%

39.0%

45.4%

Earnings

698.7%

(48.7%)

94.6%

197.5%

211.7%

671.8%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
OK, I have to mention video on demand. Netflix started up its in-house VOD service a few weeks ago, and is rolling it out slowly to existing subscribers. What many observers thought would be the death blow to Netflix has turned into an attention-grabbing market opportunity. The 1,000 titles in this downloading library is tiny next to the 70,000 in the physical video vaults, but not insanely far behind the 6,000 or so titles in your average rental store. The traditional release windows of Hollywood movies make it hard to expect new releases online anytime soon, and even studio-backed services like Movielink and CinemaNow only have a few thousand titles on tap. VOD won't kill physical rentals for years to come, then, and by the time those window frames start to soften, Netflix will have years of direct-download experience under its belt. The DVD cycle may be at its peak right now, but high-definition discs have just entered the market -- and Netflix queues -- and purely online services are still just hatching.

Come back tomorrow to see Rick Munarriz's analysis of Netflix's earnings. In the meantime, you can read up on why Netflix was selected as a winning pick for the Motley Fool Stock Advisor service. Just click here to take a free trial to the newsletter.

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  • Time Warner (NYSE:TWX)
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Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is always in demand, on demand.