For a change, investors actually have low expectations heading into a Netflix (NASDAQ:NFLX) earnings release. The streaming video giant publishes its fourth-quarter results on Tuesday, Jan. 20, and Wall Street isn't optimistic.
Netflix shares almost hit $500 before the prior earnings announcement but have collapsed by a third in the last three months. Yes, the company is expected to post a huge drop in earnings. But investors should ignore EPS and instead focus on the metric that really matters to the business right now: subscriber figures.
Wall Street is still looking for strong sales growth in the fourth quarter. Last year's price increase should help, and so should the fact that millions of new Internet-capable devices came online over the holidays. Analysts see Netflix booking a 26% revenue jump to $1.5 billion. That would be right in line with the recent past: The company logged 27%, 25%, and 24% sales growth in the first three quarters of the year.
But profits are another story. Wall Street three months ago had been targeting $0.85 in per share earnings, or slightly above the prior year's haul. However, that average target has now dropped to $0.45, which would represent an almost 50% year-over-year plunge.
|Time Period||EPS % Change|
|Fourth quarter (expected)||-43%|
Investors shouldn't worry too much about that earnings growth turnaround. For one, a huge part of the change is coming from the expansion into major new international markets. Those launches alone are likely to cleave $100 million out of profits in the fourth quarter. Management also stated in October that it was planning a significant boost in content and marketing spending in Q4 to try to take advantage of a seasonally strong time for new member signups.
Both those investments should pay off in the form of higher subscriber numbers. Investors will see the results of increased marketing spending immediately as Netflix climbs toward 40 million paying members in the U.S. this quarter.
And while the international investment will take more time before it shows profit growth, the overseas user base should pass 16 million members in the fourth quarter -- up 70% from the prior year.
What to watch instead
Subscriber growth in the United States is a better number to focus on next week. CEO Reed Hastings and his team were surprised last quarter when that figure tipped below the increase from the prior year period. And based on early Q4 results the company also for the first time projected a year-over-year slowdown in growth this quarter. Netflix expects to add just around 1.85 million new members in the U.S., or 20% below the prior year's growth of 2.33 million. Management has pointed out that subscriber growth at or above the prior year's figure is important because it shows that the market is far from saturated.
Hastings said in October that a minor slowdown doesn't have long-term implications for growth in the business. It's just a trade-off for the slightly higher monthly fee that took effect last year. Management also stood by its goal of reaching between 60 million and 90 million members at home, saying in a shareholder letter, "There is no change to our view on the long term attractiveness and US market size of Internet television, and no change to our view of the ultimate size of our US membership."
A fourth-quarter subscriber growth figure of around 2 million would bolster that argument and show that there's still a long runway for member growth at home that can keep funding the aggressive expansion abroad. But if Netflix disappoints on membership growth again, especially after this quarter's added content and marketing investments, then management might have to dial back their market expectations.
Demitrios Kalogeropoulos owns shares of Netflix. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.