Netflix will report numbers for its June quarter this evening after the close of regular market trading. As it always does, it will kick-start earnings season for techland, although using Netflix as a proxy for all of techland is foolish fodder for the naive.
Netflix is a supremely unique company in a unique market (SVOD) dominated by two companies, namely Netflix itself and Amazon (Prime Video), with a whole lot of other companies struggling to keep pace. Having said that, the market for SVOD is big enough that for the foreseeable future there is ample space for all the companies jockeying for position.
Wall Street sell-siders are expecting Netflix to report earnings of $0.16 per share on revenues of $2.76 billion for the June quarter. Consensus estimates for the current quarter ending in September are for earnings of $0.23 per share on revenues of $2.87 billion.
What drives subscribers?
Content is king in terms of driving subscriber additions. One analyst said that this June quarter was Netflix's "strongest content quarter ever." We shall see if that statement is true when the company reports numbers this evening.
The fact that Netflix is spending billions to produce more content internally is not news to anyone, however, the payoff that the company could be seeing will be borne out in its subscriber additions internationally. Or not.
The cost of getting global distribution rights to content produced externally usually comes with a lot of negative factors other than cost that make self-produced content a far better proposition using a big picture point of view. Piper Jaffray had an interesting report out that uses the existing rate of domestic additions to forecast the ramp in overseas subscribers going forward. The conclusion, as per the analyst at Piper's thesis, is that Netflix should hit 150 million subscribers globally by 2020. His breakdown is 63 million subscribers in the U.S. and the balance 87 million overseas by 2020.
It should be noted that his thesis includes zero subscribers in China, which is a huge market not just for Netflix but for almost every other international company in existence. Once Netflix has sorted through the barriers to entry (the Chinese authorities) in China and starts offering the service there, that 150 million estimate by 2020 could turn put to be conservative.
On the flip side, sell-siders who have been bearish on the stock for many quarters and in some cases many years continue to point at the huge spending by Netflix on content and valuation as their bone of contention.
Interestingly, even the most bearish among the sell-siders have still raised their price targets on the company in the last week or so. That is pretty funny from where I sit.
So their thesis is, in general, "I am bearish and I think the stock will go down so I think you (investor) should sell but I will raise my price target nonetheless."
My prediction? Slightly better than expected domestically, better than expected adds in Latin America, flattish in Europe and better than expected in Asia-Pacific.
It should be an interesting report tonight from the global SVOD leader.
(Long amzn, nflx, long and short options in both)