Netflix (NFLX) has much to prove in its third-quarter earnings report.
Shares of the streaming giant are down more than 25% since its second-quarter earnings release in July, when it reported its first-ever decline in domestic subscribers and overall weak results. With more competition on the horizon -- including from Apple (AAPL) and Disney (DIS) , both of whom are launching their own streaming services in a matter of weeks -- Netflix must show investors that it can continue growing its subscriber base in the U.S and elsewhere. Analysts polled by FactSet are expecting third quarter earnings of $1.04 per share on revenue of $5.25 billion.
Here are a few themes to watch when Netflix reports its latest earnings, expected on Wednesday, Oct. 16 after the bell.
1. Its Upcoming Content Slate
Investors were troubled by Netflix's second quarter loss in U.S. subscribers, and whether it can maintain its dominant position in the streaming business over the long term will likely be a persistent source of concern as more competitors go live. Analysts point out that Netflix's subscriber growth -- a hard-to-predict metric -- is tied to the strength of its content slate, with buzzier and more compelling shows luring in subscribers quarter by quarter.
Writing in a note on Tuesday, PiperJaffray's Mike Olson wrote that as its subscriber base grows overall, "the lineup of new content is having a more pronounced effect on net subscriber additions." An analysis of search activity and trailer views suggest that Q3 content is stronger than in Q2, which could signal U.S. subscriber growth in-line with expectations with slight upside potential internationally, according to Olson. When Netflix reports its latest earnings, investors will look for updates both on subscriber growth and what Netflix has in store, content-wise, for the remainder of the year and beyond.
2. Margins and Revenue Per User
Netflix isn't the only game in town, and will soon have more competitors with deep pockets of their own. Apple and Disney are both aggressively pouring money and marketing resources into making their streaming products a success, potentially putting Netflix on the defensive as it seeks to keep up the pace of subscribers. Evercore ISI analyst Vijay Jayant wrote in a note this week that sentiment on Netflix has turned "incrementally negative" in recent months, and that "questions about the company's business model now abound."
Well-capitalized competitors mean that investor attention may turn more to Netflix's margins and revenue per user, and not just focus on subscriber additions. While Netflix is likely to remain a leader in streaming for some time, Jayant wrote, investors may be left wondering if price wars and high content costs make streaming a "race to the bottom" -- and where exactly Netflix investors stand.
3. Pricing and Profitability
When Netflix reported a dip in U.S. subscribers in July, investors fretted that the streaming giant, which had raised prices for domestic subscribers several months beforehand, had finally pushed the envelope too far on pricing. With Apple and Disney rolling out much less costly services -- Apple TV+ and Disney+ are going live at $4.99 and $6.99 per month, respectively -- those concerns may be even more pronounced now.
In a recent note, however, RBC Capital Markets' Mark Mahaney argued that based on ongoing surveys and growth trends, Netflix has a good deal of pricing power left on a global scale: "If it executes well on its current price actions, this power could translate into sustained revenue growth rates. Note that NFLX has averaged approx. 35% Global Streaming Revenue growth for 5 straight years," he wrote.
Additionally, there's evidence that Netflix could be at least as profitable internationally as it is in the U.S., Mahaney said, based on lower production costs and less competition in many markets. When Netflix reports its earnings next week, investors will be keenly interested in its growth trends internationally and what those trends mean for its stock.