Will Netflix's Domestic Subscriber Base Drive Q4 Earnings?

Netflix’s (NASDAQ:NFLX) domestic streaming business has been a long-term growth driver. We expect its strong subscriber base to drive the segment’s top line. The company is set to report fourth-quarter 2017 results on Jan 22.

Subscriber Base Continues to Grow

Netflix’s domestic subscriber base in the third-quarter totaled 52.8 million, up from 47.5 million in the year-ago quarter. Paid members increased to 51.35 million from 46.48 million in the year-ago period.

The improving subscriber base boosted the top line. Domestic Streaming revenues improved 18.6% from the year-ago quarter to about $1.547 billion.

In the fourth quarter, management expects to see an increase of 1.25 million subscribers in the domestic segment. Moreover, U.S. contribution margin is anticipated to be around 34.4%.

For the fourth quarter, the Zacks Consensus Estimate for domestic subscribers is 54.1 million, up 9.5% from the figure reported in the year-ago quarter. Paid domestic subscribers are expected to increase 9% to more than 52 million from the figure reported in the year-ago quarter.

The Zacks Consensus Estimate for domestic segment revenues is projected to be around $1.63 billion, indicating a 15.9% improvement on a year-over-year basis.

Click here to know how the company’s overall Q4 performance is expected to be.

Intensifying Competition a Drag

Netflix is facing stiff competition in its domestic market. Apart from Amazon.com (NASDAQ:AMZN) , some of its noteworthy competitors include HBO, Hulu, Facebook (NASDAQ:FB) Watch, Apple (NASDAQ:AAPL) Music and The Walt Disney.

Most of the players are investing heavily to develop original content that has become a differentiator for attracting new subscribers. To remain competitive, Netflix is also following an aggressive content acquisition strategy that is likely to hurt profitability. Higher spending on new content has affected liquidity as debt level continues to rise.

Netflix recently hiked the price of some of its monthly subscription plans in the United States, which might have a negative impact on subscriber addition.

We note that the price hike can benefit rival services like Amazon Prime, which at almost the same price as Netflix, offers many extra benefits such as one-day delivery, music streaming and free eBooks with Prime membership. The service is also available in more than 200 countries, while Netflix is available in 190.

However, we believe that Netflix’s robust original content portfolio and a very strong programming slate in the fourth quarter positions it well compared to its peers. The new seasons of popular shows like Stranger Things and The Crown and the original movie Bright, starring Will Smith and Joel Edgerton, all released in the fourth quarter, making the platform more attractive to subscribers.

Zacks Rank and Stocks to Consider

Netflix carries a Zacks Rank #3 (Hold).

Penn National Gaming Inc. (NASDAQ:PENN) and Sony Corp (NYSE:SNE) are a couple of better-ranked stocks in the consumer discretionary sector, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Penn National Gaming and Sony are expected to release earnings on Feb 1.

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