Will Weaker Subscription Growth Affect Netflix Stock?

As Netflix Inc. (NASDAQ: NFLX) gets ready to post its first quarter earnings results later this April, market players and analysts anticipation continue to mount for the video streaming company. Yet, there is one market analyst who’s not buying the hype and expects subscription growth to take a downturn in the second quarter.

SunTrust Robinson Humphrey analyst Mr. Robert Peck recognizes the fact that market players anticipate significant upside for the streaming giant in the near term. Yet, he has given a warning to market players that Netflix may experience a slow down in subscriber growth for the second quarter. The SunTrust analyst has stated that regardless of the widely perceived idea that the subscriber base of the streaming corporation is expanding exponentially, the performance of the company for the second quarter will display a rather disappointing aura. This might even drive investors to take a step back from all the surrounding hype and turn their focus on the fundamental value of Netflix.

Based on the proprietary data work of SunTrust, although the domestic subscribers of Netflix for the first quarter may be parallel or even above the market expectations, any upside from the strong results may be offset by weak subscriber additions in the second quarter.

Yet, Mr. Peck is still bullish on international figures, which the analyst anticipates will be in line with the market expectations for the period, with the second quarter performance posing a lower obstacle. The recent cross-border expansion of Netflix all over the world will result in an increase in international subscriptions. The SunTrust analyst forecasts total and paid subscription additions to come parallel with the 4.5 million users target of the streaming giant.

The data work of the market expert implies that substantial sequential additions in subscriptions will be driven primarily by Latin America and other 130 countries where the service was rolled out in the month of January. Foreign exchange power from a more robust greenback, compared to other major currencies would also provide a moderate boost to average revenue per subscriber. This will drive revenue to post at approximately 1 percent higher, in comparison to the Street’s expectation.

However, the forecasts of Mr. Peck for the following fiscal year appears to be downbeat. While the consensus is bullish on the contribution margin, calling for an improvement of around 1500 basis points, the SunTrust analyst is below the consensus.

Mr. Peck believes that the second quarter would be discouraging, due to higher churn rate. The investment firm anticipates that people would start to renounce their subscriptions with the old pricing plans’ expiration for legacy subscribers. Netflix will ramp up legacy subscribers grandfathered into the previous $7.99 standard plan of the subscription video on-demand service platform. Two years ago, legacy subscribers were exempted from the price increase that the streaming giant employed.

Now that legacy subscribers are anticipated to pay higher subscription rates, it might lead to an increase in churn rate. With this, the SunTrust analyst predicts net paid subscriber additions for the second quarter to reach close to 200,000. Meanwhile, the higher consensus estimate stands at 600,000 users. The disappointing estimates of Mr. Peck extend for the following quarters as well, while the domestic estimates of the analyst are way below the consensus.

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