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Netflix Has a Lot to Prove on Oct. 17

By Rick Munarriz – Oct 12, 2016 at 9:08AM

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The leading streaming service is caught up in buyout buzz and slowing subscriber growth as it approaches next Monday's quarterly report.

Image source: Netflix.

If you think Netflix (NFLX -1.26%) stock has had some wild swings this year, just wait until next week. The leading premium video service reports quarterly results after Monday's close, and there's a lot riding on the fresh financials. 

It's easy to see why bulls may be feeling nervous. Netflix flunked badly last time out. It had originally forecasted that it would close out the second quarter with 2.5 million net additions, and it only came through with 1.68 million more subscribers than it had when the quarter began. It was the first time since Netflix began breaking out its streaming data five years ago that it posted fewer net additions than it did a year earlier.

Netflix rarely falls short of its own guidance, and it may very well serve up another stinker on Monday. Its outlook for the recently concluded third quarter calls for just 2.3 million in net additions. That's well short of the 3.62 million it gained a year earlier, and this guidance was issued before Netflix began to hike rates on its longtime users that were paying $7.99 or $8.99 a month. 

New subscribers are still coming, but if too many of its longtime users flinched at this summer's rate pop to $9.99 a month, it could get ugly. That's what at least one big data analytics and research specialist is suggesting. M Science is predicting that Netflix will fall 300,000 subscribers short of its target of 300,000 net domestic additions when it reports on Monday. Netflix is expected to fare far better overseas, where the lion's share of its subscriber growth has been coming from these days -- 43% of its 83.2 million total subscribers are now international and climbing -- but stalled stateside growth could be a deal breaker for investors. 

Clawing its way back

Netflix saw its stock plunge from $98.81 to $85.84 the day after it posted its disappointing second-quarter results, a sharp 13% drop in a single day. It's now back in the triple digits, more than making up the ground it lost.

It may seem like an odd rally. Growth is decelerating at Netflix, and now we can no longer assume that it's offering up lowball guidance that it can clear with ease. Between the end of grandfathering longtime users at older rates and the Olympics -- an event that caused Netflix to fall short four years ago, too -- there has to be some trepidation as we approach Monday afternoon's report.

Then we get to the takeover speculation, something that has inflated the shares to the point where at least one Wall Street pro is bearish on the stock's near-term prospects. Deutsche Bank initiated coverage with a sell rating this week, warning that revenue growth will be a challenge and that the company is unlikely to be acquired.

It doesn't have to be bad. Folks are paying more for the service, and that should benefit Netflix's bottom line. International growth should be healthy. Now that the August hike for early users is complete, the comparisons will get easier from this point out. Investors have every right to fear the stock's move next Tuesday. There are many things that can go wrong. However, it's hard to dismiss the chances of a stock that's been the S&P 500's hottest performer in two of the past three years.

Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. 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.

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