Netflix, Inc. (NASDAQ:NFLX) is scheduled to report third-quarter 2014 earnings on Oct. 15 after the market close. In a report dated Oct. 12, 2014, analysts Edward S. Williams, San Q. Phan and Thomas F. Andrews at BMO Capital Markets said they are expecting the company to post strong subscriber net adds driven by the expansion of the company in six European countries on Sept. 18.
European expansion to support subscriber growth
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The report suggested that Netflix is expected to post third-quarter revenue of $1.414 billion and earnings per share of 90 cents, compared to $1.106 billion and 52 cents in the corresponding quarter of the previous year. The consensus revenue estimate is $1.409 billion.
The countries where the company expanded are France, Germany, Switzerland, Belgium and Luxembourg. In the report, the analysts noted that the initial impact from paying subscribers will not be seen until the fourth quarter due to the late expansion in the third-quarter and a one-month trial promotion.
The company’s gross margin is expected to come at 31.4%, while its operating margin is expected to be 7.3%, indicating high costs incurred during the expansion in Europe. During the quarter, the online video streaming company is expected to have added 1.472 million subscribers in the U.S. and internationally, 2.387 million subscribers.
According to the BMO analysts, the streaming company “will continue to manage rising content costs to contribution margins and leverage domestic profits” to boost international presence. The company’s operating income is expected to increase 85% from $104 million last year in the same quarter.
Netflix focuses on exclusive content
Netflix is seeing a lot of potential in exclusive content production, not limited to just TV series, but also movies. Recently the company entered into a deal with Adam Sandler for four original movies and a sequel to the 2000 Academy Award winning title Crouching Tiger, Hidden Dragon (exclusive on Netflix and in selected global IMAX theaters).
The company is transforming traditional video entertainment, and analysts are expecting exclusive content, either Netflix originals or exclusive licensed content, to fuel more subscriber growth. The analysts have maintained their Market Perform rating on the stock with a 12-month price target of $400. Netflix is expected to expand its subscriber base, but they believe that shares of the company are trading at a price that adequately reflects its current earnings potential.