Netflix needs more streaming addicts

<p>When there’s more than one cartel in town, things can get messy. That’s a lesson to be learned by viewers of ‘Narcos’, one of Netflix’s latest in-house productions.</p>

When there’s more than one cartel in town, things can get messy.

 

That’s a lesson to be learned by viewers of ‘Narcos’, one of Netflix’s latest in-house productions.

And it’s not one lost on the $42bn California-based group either, itself a purveyor of addictive goods, albeit of the much less harmful kind.

Netflix’s US subscriber growth hit a giddy peak in the first quarter of this year at well above 4 million net additions.

It then slumped to a rate that was no more than half that in the next two quarters.

 

Some of Netflix’s comedown was self-inflicted.

 

Whilst reporting the big Q2 net adds tumble, it admitted to allowing some subscribers to hang on to lower rates for longer, when it jacked prices up a couple of years ago.

When the grace period ended for those customers, the cost of their subscriptions rose—at least it did for those who didn’t cancel.

Netflix’s motivation for such antics links back to competition.

A survey by GfK out last week showed the number of US video viewers signing up for more than one online streaming service rose 60% in three years.

Some of these will have added Amazon’s standalone monthly subscription deal, which launched in April, a day before Netflix shares saw one of their biggest one-day drops in two years.

 

And then there are costs.

 

The company has been spending $6bn a year on movie and TV content and says it will fork out more.

Under those circumstances, there’s no way its $1bn cash burn a year will slow anytime soon.

Instead, Netflix hopes to close the gap by lifting operating profit, its CFO said in September.

Headroom to pull off that plan is now tighter, though, following the slide in U.S. sign-ups. And in April Netflix cut its international growth guidance too.

Elsewhere, the group also has at least $7bn in off-balance sheet liabilities to contend with.

These could rise by another $5bn over three years by our reckoning, though some banks see total potential liabilities much higher.

 

Netflix does have one strength which is difficult to predict.

 

Like any effective dealer it has become skilled at stoking ‘binges’ by its customers.

Some viewers devour an entire season in one week, Netflix disclosed in June.

The question is whether ‘binge-watching’ will rise fast enough to justify a Netflix valuation that is 311 times its earnings over the last twelve months, and 136 times income forecast for fiscal 2016.

Netflix will release its third quarter earnings on Monday 17th October, after the U.S. market’s close.

 

  • At the very least, the group needs to hit guidance that it will add 300,000 US subscribers in its third quarter and 2 million overseas.

 

  • Wall St. is expecting revenues for the quarter to rise 31% year-on-year to $2.28bn and adjusted earnings per share that are 20% lower at 6 cents.

 

  • A major ‘miss’ could trigger another spectacular fall by Netflix’s volatile shares, adding to their 11% loss this year.

 

  • If the group ‘beats’ on net adds, and preferably revenue too, the stock could be in for a memorable jump.

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