Don't Ask If Netflix Will Beat Subscriber Additions In Q4, Ask By How Much

On October 14, Netflix announced results for its Q3 which were met by a chorus of boos due to the fact that the company missed on U.S. subscriber additions for the quarter. The company added 880k subscribers in the U.S. versus Street expectations of 1.25 million which the company explained (inadequately) by saying that changes in its online billing system was the main reason for the miss.

In terms of international subscriber adds, the company added 2.7 million new subs while Wall Street was expecting 2.45 million.

Most investors would have thought that the two were mostly a wash but not surprisingly in the "shoot first, ask questions later" environment our U.S. Fed has created (interest rate anxiety), shares were hammered lower by about 14% the next day and lost another 4-5% in the days following the earnings report.

For the December (current) quarter, Netflix guided Street analysts to net additions of 1.65 million U.S. based subscribers and 2.4 million new subscribers on the international front.

My take is that Netflix is gearing up for a spectacular Q4 and beyond and my reasons are as follows:

• The issues (U.S. subscriber addition miss in Q3) that the company said were caused by the shift to the new billing system should be long sorted and as a result that short-fall will be a positive tailwind already going into the December quarter. That 370k "miss" in Q3 will give them a running start to the December quarter domestic additions forecasted.
• According to WhaleWisdom's compilation of 13F filings by institutions, Netflix was one of the most popular stocks added by the big boys in Q3 with 148 new institutional investors buying shares in the company.
• This past Friday, a report by RBC said that Netflix usage levels made a new historical record based upon their survey of more that a 1,000 people. The report went on to say that Netflix usage surpassed Youtube ( Google /Alphabet) and Prime (Amazon). Most importantly, churn rates (per the RBC survey) were near record lows with almost 75% of those polled say they were "not at all likely" to cancel Netflix subscriptions. In the same report, RBC found that more than half of U.S. internet users have used Netflix to watch movies or tv shows in the past 12 months.
• In another hugely positive development for Netflix and one that has gone relatively unnoticed by most investors and analysts is the unlimited mobile video streaming plan (for Netflix, HBO and Hulu) offered by T-mobile to its subscribers. This move by T-mobile will almost certainly be matched by the other major U.S. carriers who will otherwise risk losing subscribers to T-mobile. As unlimited data streaming plans picks up steam (first in the U.S and then globally), Netflix will definitely be a major beneficiary both, at home and overseas.
• Finally, the Australian Communications and Media Association (ACMA) said in a recent report that in the first six months of 2015, an estimated 3.2 million adult Australians (17% of overall population) watched video content via SVOD or "streaming video on demand" (SVOD providers in Australia include Netflix-launched in Australia in March 2015, Presto TV and Stan) and of those 3.2 million Australians that watched SVOD in the first 6 months of 2015, a full 78% used Netflix Australia. In addition, in the last seven days of June 2015, an estimated 2.2 million (12%) Australians watched SVOD content and of those, 88% used Netflix Australia. I am not even factoring in the launches in Spain, Italy and Portugal in the current quarter and South Korea, Hong Kong, Taiwan and Singapore in early 2016.

Summing it up, Netflix should handily exceed expectations for Q4 and for the foreseeable future.

Words to the wise.

As always, "may the trade always be in your favor".

(Long Netflix shares and calls)