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Netflix Q1 Preview: Another Blockbuster Quarter Despite Price Hikes?

When Netflix reports first-quarter 2018 earnings Monday after market close, investors again will laser in not on revenue or profits — but on the number of net adds, a key indicator of the subscription streamer’s momentum.

For Q1, Wall Street analyst consensus estimates are for 1.48 million net streaming U.S. subscriber adds, and 4.84 million internationally. That’s roughly in line with what Netflix forecast in January (1.45 million domestically and 4.90 million internationally).

The expected strong showing comes after Netflix raised the price of its streaming plans in the fourth quarter of 2017 for customers in multiple territories, a demonstration of its relative pricing power. In the U.S., for example, the standard two-stream HD plan rose from $9.99 to $10.99 per month — still a great value, analysts observed.

“A steady stream of new content introduced throughout Q1 likely mitigated churn associated with higher pricing on standard and premium plans,” Wedbush Securities’ Michael Pachter wrote in a note issued last week.

Analyst consensus estimates for Netflix Q1 see revenue of $3.69 billion and earnings per share of 63 cents. Investors remain upbeat on the company, even as it doubles down on its heavy, debt-fueled content strategy (with content expenditures of up to $8 billion this year, vs. $6 billion in 2017).

Netflix’s cash burn (negative free cash flow) is expected to increase from $2 billion in 2017 to $3 billion for the full year 2018, Goldman Sachs’ Heath Terry wrote in a note last week. Terry raised his price target on the stock, from $315 to $360 per share, citing a strong originals slate, new distribution partners (including T-Mobile) and returns from increased marketing spending.

Over the past eight quarters, Netflix has on average topped its total net subscriber addition guidance by around 950,000, mostly on stronger-than-expected international additions, Pachter noted. However, a year ago, Netflix turned in subscriber metrics slightly below forecasts, delivering 4.95 million in Q1 2017.

Is Netflix poised for a Q1 2018 beat? Thanks to its continued growth — and bullish analyst forecasts — Netflix’s stock is up 62% year to date, besting nearly every other company on the S&P 500 and outperforming the other stocks in the FAANG (Facebook, Amazon, Apple, Netflix, Alphabet/Google) cohort tracked by Wall Street.

Netflix has “an increasingly robust content slate,” Cowen & Co.’s John Blackledge wrote in a Q1 earnings preview. He estimated Netflix released some 483 hours of U.S. original programming in the first quarter, up 85% from a year earlier.

In the first quarter, Netflix debuted 18 new original series, including 11 returning series, and 14 new original movies. Those included season 2 of “Marvel’s Jessica Jones” and sci-fi series “Altered Carbon.”

But Netflix currently has a weaker originals lineup going into Q2, with nine original series (five returning and four new series), including “Lost in Space” and second seasons of “Dope,” “3%,” and “Marvel’s Luke Cage.”

Wall Street expects 5.2 million net streaming adds in Q2 2018, but that “may be on the high side,” RBC Capital Market’s Mark Mahaney wrote in a note. He cited “what doesn’t clearly appear to be a rock-star spectacular Q2 new content slate” as well as typically weak Q2 seasonality and “tough comps” with Netflix’s huge beat in the second quarter of 2017.

Two wildcards on Netflix’s Q2 content performance remain, according to UBS’s Eric Sheridan: When season 2 of popular teen drama “13 Reasons Why” will be released and whether Netflix “is enjoying success in its local-language content initiatives outside of North America,” he wrote in an April 11 note.

In addition, Netflix’s newly expanded deal with Comcast — under which the cable operator will bundle Netflix service with new and existing TV packages — could give Netflix a boost in Q2, which is historically weak for subscriber additions.

Meanwhile, Wedbush’s Pachter pointed to Netflix’s potential longer-term risk from losing content-licensing deals. It’s worth noting that the bulk of the viewing on the platform remains generated by licensed TV shows and movies — with licensed content estimated to account for 80% of Netflix’s U.S. streams for the 12 months ended September 2017, per a study by 7Park Data.

“[T]he combination of less content from Disney (pulling the majority of its newer content at the end of 2018) and a steady migration of Comcast, Time Warner, and 21st Century Fox content towards exclusive deals with Hulu will ultimately lead to lower subscriber satisfaction,” he wrote.

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