Netflix (NFLX +0.03%) has a date with destiny next week. The company reports quarterly earnings after the closing bell on Monday, Oct. 21.
Shares are on fire this year -- up nearly 250% -- which makes it the second biggest gainer in the S&P 500 as we head into 2013's final quarter.
NFLX Total Return Price data by YCharts.
To keep your seat at an elite table like that, middling results aren't going to cut it. With that in mind, here are three key things that Netflix needs to prove if it's going to warrant the enthusiasm that's built into the surging share price.
It can keep growing domestically
"Saturation." That's the risk that Netflix executives mentioned for the first time in last quarter's shareholder letter -- and it made bulls shiver. The company patted itself on the back for logging better growth rates this year, but warned that "the risk of U.S. market saturation only grows as we do."
Image source: Netflix.
That makes sense. Netflix already has 30 million paying subscribers. And Amazon.com (AMZN +1.39%) is in the streaming market for the long haul. Its Prime instant video service is set to debut Amazon's first crop of original series later this year, which could give subscriber numbers a boost. Under those circumstances, there will come a time when growth slows domestically. Netflix needs to show that such a day is still a ways off. Reporting net subscriber growth of about 1.16 million users on Monday would do the trick, as that's exactly how many domestic subs Netflix added in the year-ago quarter.
The international strategy is working
"Our strategy is to expand as quickly as possible while staying profitable on a global basis."
-- Netflix's long-term view
Netflix is losing money in its international markets -- a lot of money. Over the last 12 months it burned more than $300 million on those ventures abroad.
While those investments have swamped the rising profits from back home, they have been for a good cause. Netflix has established an early foothold in some choice markets, and the number of paid subscribers outside the U.S. has almost tripled since the beginning of 2012. Still, to demonstrate that the growth strategy is working, Netflix needs to show continued growth in all of its markets abroad, with net additions of about 1 million users there.
The DVD business is still in business
Despite having lost millions of subscribers in the past few years, the DVD business remains important to Netflix's results. Last quarter that division was worth about 25% of total revenue, and it contributed almost as much profit as the streaming business did.
To keep that cash flow predictable, Netflix needs to show that the pace at which it's losing subscribers has steadied. That figure was almost 500,000 DVD subs last quarter, about 6% of its base. If it reports around 7 million DVD subscribers on Monday, we'll know that the business is in a relatively stable decline, and that it should continue to chip in profits for the foreseeable future.
No end to stock debate
Whatever Netflix reports next week, shares are likely to swing wildly as bulls and bears fight over their interpretation of the results. Even a blowout earnings report wouldn't settle the debate on this controversial stock. Still, as a shareholder I'm interested to see how Netflix's long-term strategy plays out, and I'm willing to hold on through some turbulence along the way.
