Netflix Earnings Preview: Expect ‘Involuntary Churn’ Excuse Again

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Netflix is scheduled to release its fourth quarter earnings report on Tuesday after closing bell. Consensus estimates suggest earnings of 2 cents per share and revenue of $1.83 billion. After being one of Wall Street’s favorite stocks in 2015, some firms are starting to expect a pullback in the stock. One of the streaming firm’s biggest bears seems to be Wedbush analyst Michael Pachter, who has an Underperform rating and incredible $40 per share price target on its stock.

He believes the current valuation is unwarranted because of “the potential for slowing domestic growth coupled with decreasing international profitability.”

What to expect in Netflix’s earnings report

His estimates are about in line with consensus at 2 cents per share in earnings and $1.84 billion in revenue. Netflix guided for earnings of 2 cents per share. He believes the company added 1.65 million domestic subscribers and 3.75 million international subscribers during the fourth quarter. Management guided for about 1.65 million domestic adds and 3.5 million international adds.

Pachter believes that the recent release of its first three feature films drove subscriber growth even though the Adam Sandler film received poor reviews. He also thinks Netflix’s partnership with DISH Network for one free year of service added between 400,000 and 500,000 new domestic subscribers. Internationally, he believes the launches in Portugal, Italy and Spain drove subscriber adds.

Looking into 2016

For the first quarter, he expects Netflix to guide for about 1.8 million domestic subscriber adds and 3.75 million international net adds. Last year the company added 2.28 million domestic subscribers and 2.6 million international subscribers. Meanwhile Netflix is speeding up the release schedule for its original series and films and is now benefiting from global availability except for China, Syria, North Korea and Crimea.

For 2016, the Wedbush analyst believes content spending will eat up the extra revenue earned from the price increase, so he believes this year’s earnings will be about flat with 2015’s earnings.

In the third quarter, Netflix encountered issues with charging the credit cards of its customers due to the high rate of card replacement underway as credit card companies replace old cars with new chip cards. The result was a revenue miss due to “involuntary churn.” However, Pachter thinks this was only part of the problem, and he believes management will use this excuse this time around as well. Further, he expects the June and September quarters to see modestly higher rates of voluntary churn as customers drop Netflix due to the $2 price increase for 25 million domestic subscribers.

Netflix shares pulled back on Friday, falling by as much as 3.64% to $103.20 per share. The streaming company said it will begin cracking down on VPN users who mask their location in order to be able to access its service. This may disappoint some paying subscribers who pay for accounts but use a VPN to access content that’s not available in their markets (i.e., Australians who use a VPN to access U.S. content).

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