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Why Netflix needs an earnings win

Aaron Pressman

Netflix (NFLX) is expected to report today that it more than doubled second quarter profits from a year ago, but the company’s shares have risen almost as fast.

That leaves the debate raging over the almost $27 billion market value of the world’s leading online video service. Supporters point to rapid growth in revenue and subscribers while skeptics note the sky-high P/E ratio, currently hovering around 170.

Analysts expect Netflix will report earnings per share of $1.14, slightly more than the company’s $1.12 forecast and more than double the 49 cents from last year’s second quarter. Revenue is projected to increase 25% to more than $1.3 billion, according to FactSet.

Related: Microsoft, Facebook, Amazon, Apple  highlight biggest week in earnings

But day traders beware – even though Netflix has a penchant for beating analyst earnings expectations, the stock price doesn’t always follow. Last year’s second quarter earnings came in 21% over analysts' estimates but the stock dropped almost 5% over concerns about U.S. subscriber growth. Netflix beat earnings expectations in 8 out of its last 10 quarters, but the stock only closed higher the next day 5 times, according to FactSet.

Netflix expected to add almost 1.5 million subscribers, including about 500,000 in the United States, in the quarter, CEO Reed Hastings said back in April. Any shortfall could send the stock price tumbling. Investors will also be eager to hear from Hastings about the impact of the company’s recent price hike on new customers. Netflix raised the price of its most popular monthly option by $1 a month to $8.99, but existing customers won’t pay more for two years.

With the price hike done and a slate of original programming up and running, investors will also be sure to listen for hints of any new strategic moves. Badly burned by his ill-conceived Qwikster plan, Hastings now prefers to telegraph any such moves far in advance.

But just where Hastings wants to go next isn’t clear. International expansion is rolling along – Netflix announced in May planned launches in France, Germany and four other European countries. The original series, such as "Orange Is the New Black" and "House of Cards," have grabbed Emmy nominations, critics’ praise and viewers.  An Asian foray could be up next, some analysts say.

Netflix supporters have lately been pointing excitedly to Rupert Murdoch’s $80 billion bid for Time Warner (TWX), which implicitly valued HBO at about $20 billion. If slower-growing HBO is worth $20 billion, Netflix could easily be worth $27 billion or more, so goes the argument.

But, in the short term at least, the focus for investors remains firmly on this quarter’s results.

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