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What You Should Be Watching With Netflix

By Jim Mueller, CFA and Austin Smith - Dec 22, 2012 at 11:00AM

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No, we don't mean movies. These are the key metrics Netflix investors need to keep an eye on.

Netflix has become increasingly popular in the finance world and in the media. With an endless stream of news stories, from the Qwikster debacle to Reed Hastings' Facebook posts, it's tough for investors to know which headlines are important and which ones are just noise. In this video, Jim Mueller tells us exactly what reports we should be tuned in to.

First, subscriber growth is an essential component of Netflix's business model. When the share price was rocketing up to about $300, Netflix's growth year over year approached 70%. Following the Qwikster debacle, growth is running at about 20%-25%. Those numbers are still healthy, but investors should keep an eye on Netflix's growth and be cautious if those rates begin to slide.

Second, management has been issuing quarter-ahead guidance on subscriber growth since at least 2006, and there's been an overestimate only four times. The Qwikster incident resulted in a 3.9% miss, but the other misses were around 1% off. in general, when management isn't spot-on with its estimates, it's conservative. Management understands the business and can provide reliable forecasts that investors can use.

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