Netflix's Sub Churn Is A Near-Term Headwind But Growth Story Is Intact

Netflix, Inc. NFLX is scheduled to report its Q3 earnings on October 17.

The company wiil likely post strong revenue growth, backed by price increases, while reporting low numbers for net paid subscriber additions, due to churn, MKM Partners’ Rob Sanderson said in a report. He maintained a Buy rating for the company, with a price target of $130.

“Despite transitory subscriber growth headwinds, price increases are a clear positive for profit contribution and we believe the long-term bull thesis is intact,” Sanderson commented.

Related Link: What A Netflix Acquisition By Apple Might Look Like

Sub Trends

There has been churn volatility, and Netflix had missed guidance by about 800,000 in Q2. Since Q3 guidance was announced about 1.2 million below previous expectations, the consensus forecast was revised and the company is likely to meet these.

“If the full Q2/ Q3 miss and y/y decline for Q4 is entirely price-related churn, this would reflect about 3% of the paid subscriber base last quarter,” Sanderson wrote, adding, “Our recent survey suggests that churn is about in-line with current consensus and not competition driven.”

Powerful Profit Growth Story Intact

Netflix’s EPS power remains intact and on track, the analyst commented. He added that a rise in ARPUs has likely resulted in solid revenue growth in Q3. Terming the sub growth headwind as “transitory,” Sanderson mentioned that the price hikes were a “clear positive for profit contribution.”

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