Should Netflix Bother Worrying About Amazon and Outerwall?

Netflix (NFLX -3.92%) will release its quarterly report on Monday, and investors have sent the stock to brand-new record highs, completing its huge comeback from its plunge two years ago. As Netflix earnings are poised to soar, the question facing investors is whether they truly need to worry about the presence of Amazon.com (AMZN -1.64%) and Redbox-owner Outerwall (OUTR) as a realistic competitive threat.

Two years ago, many investors had left Netflix for dead, as missteps from CEO Reed Hastings had seemed to alienate the company's customer base. By segmenting the business, some feared that Amazon would be able to compete more directly against Netflix's streaming side of the business, while Outerwall and its Redbox DVD service would crush Netflix's legacy DVD-by-mail offering. Yet neither of those fears has come to pass. Can Netflix keep soaring? Let's take an early look at what's been happening with Netflix over the past quarter and what we're likely to see in its report.

Stats on Netflix

Source: Yahoo! Finance.

Which way will Netflix earnings go this quarter?
In recent months, analysts have boosted their views on Netflix earnings even further, with a nearly 10% jump in third-quarter estimates and a more than 10% boost to full-year 2014 projections. The stock has kept rising sharply, with gains of 23% since mid-July.

Netflix has come back from the dead, hitting the lofty $300 per share level once more just last month and rocketing upward to new all-time record highs. Interestingly, it has done so despite a second-quarter earnings report that actually sent shares down briefly. Yet a look at the report shows many positive signs for Netflix, including strong subscriber growth both domestically and internationally, smaller losses overseas, and slower DVD-subscriber deterioration than many had expected.

Amazon isn't letting Netflix win without a fight, though. The company is spending on original content as well as making exclusive-streaming deals with other content providers in order to shore up its own attractiveness. Yet the success of Amazon Prime doesn't necessary stem from the streaming service, as many shoppers joined the service simply to reap the rewards of fast free shipping and its lending library for Kindle users long before streaming became available.

But Netflix has also taken a big step forward by working with cable operators in an attempt to make its service available through set-top devices. Comcast and other cable companies have traditionally seen Netflix as a rival, but the potential to keep would-be Netflix subscribers from defecting entirely and cutting the cord on their cable service is an enticement to try to bring Netflix on board. At the same time, offering a separate Netflix distribution vehicle puts another barrier to entry up against Amazon's competing streaming service.

In hindsight, Netflix's move to deemphasize its DVD business has seemed prescient. Last month, Outerwall had to cut its quarterly outlook, as heavy promotional spending didn't lead to the sales gains it had hoped to see. Outerwall's new guidance suggests weaker results for the remainder of the year, and its Redbox Instant streaming service faces the huge task of trying to overcome Amazon's and Netflix's huge lead in streaming.

In the Netflix earnings report, watch to see whether the company produces blowout numbers for subscriber and revenue growth. With the stock at lofty heights, expectations will be high, and anything short of perfection might produce another post-earnings dip for Netflix shares.

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