Netflix, Inc. (NASDAQ:NFLX) earnings are set to hit the market next week, and the company’s second quarter was strong, at least according to analyst projections. The company’s performance in the three months was apparently led by its original content gains. The company’s own shows are believed to be the driving force behind subscription growth.
According to a Goldman Sachs report on the company’s coming earnings, subscriptions in the United States are set to increase by 600,000 at least in the coming quarterly report, while the company’s international business is set to add 1 million new subscribers in the period. The future of the company’s business relies on its ability to produce great content, and that’s all that matters to analysts.
Netflix growth needs new contact
The major driver of user growth in the second quarter of 2014, according to the Goldman analysts, was the second season of Orange is the New Black, the hit prison dramedy from the creator of Showtime’s Weeds. All of Netflix, Inc. (NASDAQ:NFLX) value to users doesn’t lie in the company’s original content, but most of its value to investors does.
Original content drives user growth at Netflix, Inc. (NASDAQ:NFLX). That’s become a truth accepted by analysts. Users may spend much more of their time watching older shows, but they won’t pay $8 a month in order to watch Better Off Ted again. People pay for content in order to be on the cultural ball.
Netflix needs to have content first in order to make sure its name is culturally relevant and those that love TV and movies attach themselves to a Netflix, Inc. (NASDAQ:NFLX) subscription. Heath P. Terry, who led the Goldman analysts in writing this report, thinks that “there is opportunity for further outperformance.”
That doesn’t mean that Netflix, Inc. (NASDAQ:NFLX) is riskless however. The Goldman report puts a price target of $560 on the company’s shares. That’s a big premium on an already massive valuation, and the company faces serious risks. Some of them are placed at the end of the Goldman report and they’re worth examining before any bet on Netflix Inc (NASDAQ:NFLX) is made.
Netflix faces cost ballooning
There is only one massive worry for Netflix, Inc. (NASDAQ:NFLX) investors. If the company has to reduce its margins, it simply isn’t worth what today’s market says it is. The company’s market is, despite apparent evidence to the contrary, highly competitive and margins have a way of being crushed in atmospheres like that.
Netflix, Inc. (NASDAQ:NFLX) could face rising content costs and rising marketing costs as it continues to try to add new shows to its service. International expansion is already burning a hole in Netflix, Inc. (NASDAQ:NFLX) corporate accounts and the company may be facing huge opponents as Time Warner appears about to join with another media giant.
The future looks good at Netflix, but the company’s massive valuation, which prices shares at more than 150 times 2013 earnings, means that any wobble in its expected growth trajectory could eat into its share price in a big way. Investors should keep an eye on costs as well as subscription growth if they want to keep a solid image of the company’s performance in their minds.