Netflix, Inc. (NASDAQ:NFLX) is slated to report Q2 earnings on Monday, July 17 after market close. The consensus on Wall Street is for the video streaming company to report revenue of $2.76 billion, good for 31.4% year-over-year growth and EPS of 16 cents, compared to 9 cents posted during last year’s comparable quarter.
There’s an earnings whisper that NFLX might post earnings of 18 cents, thus extending its earnings beat to seven straight quarters. Netflix has had little problem exceeding estimates by a wide margin in the past, though analysts have wised up to it and the beat has been narrowing.
Netflix Quarterly Earnings Surprise History
NFLX stock, though, isn’t judged so much on earnings, but rather on another more spurious metric — subscriber growth. Netflix has performed well during times of rapid subscriber growth, and poorly whenever subscriber growth shows signs of slowing down.
Netflix stock took a 5% spill after the Q1 earnings call — despite beating on both the top and bottom lines — when management revealed the company had managed to add just 1.42 million domestic subscribers, which was 80,000 short of the consensus estimate. New international subscribers clocked in at 3.53 million, 170K shy of the company’s guidance.
Some analysts opined that the sub-par subscriber growth could be chalked up to Netflix churning out less-than-stellar content offerings, as well as increasing competition from the likes of Amazon.com, Inc. (NASDAQ:AMZN) and Hulu.
Leaving Money on the Table
Historically, Q2 is a seasonally weak quarter for Netflix. It probably doesn’t help that a recent story from Fortune claimed that a Reuters/Ipsos survey has found that password sharing is increasingly becoming a menace for media companies such as Netflix.
According to the survey, more than 20% of young adults who stream video have borrowed passwords from friends living outside their households, thereby deriving companies like Netflix of much-needed subscription revenue.
Raymond James analyst Justin Patterson reckons that if Netflix revenue growth took a hit from password sharing and slowed from current percentages in the 30s to the teens, the company would be forced to reconsider its lax attitude toward the matter.
There’s little doubt that allowing people to share passwords is tantamount to video streaming companies leaving money on the table. Actually, the Ipsos survey might have even under-reported the true extent of password sharing. A survey conducted in 2016 by Survata for Quartz found that 50% of people aged 18-24 mooch off someone else’s Netflix account, and that figure jumped to 69% for teenagers. Overall, approximately one-third of NFLX consumers don’t pay for their own service.
Netflix has already crossed the 100-million-subscriber mark. Assuming international trends are similar to those in the U.S. (actually, they are likely to be even worse due to lower income levels), that’s at least 50 million subscribers who piggyback on other people’s Netflix subscriptions. That’s a heck of a lot of potential subscriptions.