* Reports 3Q 2019 results on Wednesday, October 16, after market closure
* Income expectation: $ 5.25 billion
* EPS expectation: $ 1.03
When the streaming giant Netflix Inc (NASDAQ 🙂 reports its 3Q later today, it must demonstrate that the plunge in the number of paid subscribers in the last quarter was just a deviation and not the new norm.
Investors have severely punished Netflix for its mass in the second quarter, causing its shares to fall by more than 25% in the next three months – the worst performance among the largest technical stocks in that period. the stock closed at $ 284.25 yesterday, well below the record high of $ 423.21 it reached in June 2018.
What affected the shares the most was the unfavorable consumer reaction to Netflix price increases: the company mainly lost subscribers in those regions where it increased monthly prices for its streaming packages.
For many, that showed a limit to the price power that Netflix could use to bridge the gap between its income and spending. It also meant that the path to profitability for the company might not be as smooth as many analysts had priced in, especially at a time when cash was draining and borrowing heavily to produce new content.
Competition is more intensive
The shock on 2Q's profit also forced investors to take the coming competition more seriously. The Walt Disney Company (NYSE 🙂 announced in August that it offers a new bundle of streaming services for a surprisingly low $ 12.99 per month, with a package with family programming, live sports and a deep library with television programs & # 39; s. Disney is modifying Netflix's standard plan and bringing the service to the market with $ 3 under the premium version.
Apple Inc. (NASDAQ :), another major candidate in the streaming industry, plans to roll out the Apple TV + film and TV subscription service by November, according to Bloomberg news possibly only $ 9.99 per month . AT&T Inc. (NYSE 🙂 and Comcast Corp & s (NASDAQ 🙂 NBC Universal are also planning to offer their streaming versions – all aimed at ending the Netflix monopoly.
The intensifying competition makes Netflix a risky bet in the short term, but that does not mean that the company has completely lost its fan base. Netflix has exceeded a strong state of expectations. For 3Q, it predicts the addition of 7 million new paid subscribers compared to 2.7 million it added in the previous period.
If the company is able to add more customers than expected and continues to release new content that allows viewers to stick to the app, we can expect some recovery in inventory.
Bottom Line
The rising trajectory of Netflix shares has been largely unhindered in recent years. Over the past five years, the company has generated on average 27% growth per year in paid subscribers.
But with the upcoming competition, rising content costs and saturation in the domestic market, the path will not be that easy.
In our opinion, investors will continue to shun Netflix until they see a clear sign that the company is holding up well and can defend its turf. A revival of subscription growth in the second half will be an important development for confidence.
