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Netflix Results Will Test Investors’ Mettle as Competition Looms

Kamaron Leach

(Bloomberg) -- The stakes are often high when Netflix Inc. reports results: Stock swings of 10% or more aren’t uncommon. But with the shares down more than a fifth since the streaming giant disappointed investors in July, the risk of another plunge may be lower this time around.

When Netflix posts results after markets close Wednesday, analysts expect an increase of about 800,000 U.S. subscribers for the third quarter and about 6 million internationally. Whether or not the company hits those targets may depend on how much Netflix’s new programming resonated with viewers.

The timing of Netflix’s latest shows probably helped subscriber growth, said Third Bridge’s Scott Kessler, who cited the new season of “Stranger Things” as a potential driver. Netflix also may have gotten a boost from a competitor’s show, HBO’s “Game of Thrones,” ending its run.

Gerber Kawasaki Inc., a Netflix investor, also expects “a pop from the people moving from HBO and resubscribing,” thanks to “Stranger Things.”

Still, Gerber investment adviser Nick Licouris said the firm has been reducing its position because of looming competition from Apple Inc., Walt Disney Co., AT&T Inc. and Comcast Corp. The Santa Monica, California-based wealth manager holds more than 12,000 shares valued at almost $3.7 million, according to a June regulatory filing.

The earnings report this afternoon “is a heavily debated setup, the trickiest one in a while,” said Lynx Equity analysts KC Rajkumar and Jahanara Nissar. The firm called it “a high-wire act” where “much could go wrong.”

Given that Netflix has been growing so much faster internationally, analysts will be eyeing the company’s progress -- and spending -- in key foreign markets.

“We’re looking to see if there’s any meaningful traction with some of the lower-priced, mobile-only plans -- with India primarily,” Andy Hargreaves, a KeyBanc Capital analyst, said in an interview.

Netflix itself predicted in July it would add a total of 7 million subscribers in the third quarter -- 800,000 in the U.S. and 6.2 million elsewhere.

Read more: Netflix Investors Are Bracing for Another Disappointing Quarter

Many investors may still be smarting from the company’s last quarterly report. Three months ago, Netflix posted disappointing second-quarter subscriber growth -- and a rare drop in the U.S. The shares slumped 10%.

“It would be hard for it to be worse” this time, Hargreaves said, though investor concerns will persist as new streaming services increase the risk of higher subscriber churn or marketing costs, according to a note.

Rosenblatt Securities predicts the company’s fourth-quarter subscriber guidance will miss Wall Street’s consensus, according to a note from analyst Bernie McTernan. He expects the forecast to “be treated with greater than normal skepticism” given that Netflix is reporting weeks before the launch of competing offerings, such as Disney+.

“Netflix has never faced this level of competition from a new entrant,” he wrote.

And although Netflix remains the largest short in the film and entertainment sector, “short sellers have been slowly trimming their exposure,” according to financial analytics firm S3 Partners. The streaming service’s short interest totals $6.2 billion with almost 22 million shares shorted and about 1.8 million shares covered since the beginning of August, the firm said.

Gerber’s Licouris sees room for both a Netflix and Disney+, but warns that “at some point, it becomes extremely saturated.”

On Tuesday, for example, the largest U.S. theater chain, AMC Entertainment Holdings Inc., announced a new service that would give U.S. subscribers online access to nearly 2,000 movies for rent or purchase.

See also: Netflix Earnings-Linked Options Lean Bullish in Run-Up to Report

What Bloomberg Intelligence Says:

Netflix will not only have to exceed its guidance for 7 million subscriber additions but also deliver a healthy 4Q forecast to allay concerns that have dogged the company.-- Geetha Ranganathan, senior media analyst-- Click here for the research

Just the Numbers

3Q streaming paid net change estimate (Bloomberg MODL)3Q domestic +798,3603Q international +6 million3Q revenue estimate $5.25 billion (Bloomberg data)3Q GAAP EPS estimate $1.05 (range $1 to $1.23)4Q streaming paid net change estimate (Bloomberg MODL)4Q domestic +1.28 million4Q international +8.04 million4Q revenue estimate $5.51 billion (range $5.40 billion to $5.70 billion)4Q GAAP EPS estimate 82c (range 44c to $1.12)

Data

31 buys, 10 holds, 4 sells; avg. PT $365.36Implied 1-day share move following earnings: 11.0%Shares rose after 6 of prior 12 earnings announcementsGAAP EPS beat estimates in 9 of past 12 quarters

Timing

Earnings release expected 4 p.m. (New York time) Oct. 16Conference call website

For deep estimates in this story see NFLX US Equity MODL

(Adds analyst comment in sixth paragraph and short interest commentary in 14th.)

To contact the reporter on this story: Kamaron Leach in New York at kleach6@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Nick Turner, Rob Golum

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