Netflix Earnings Preview: Third Quarter 2008

Netflix (NFLX: 71.97 0.00%) is scheduled to report third quarter 2008 results after the market closes on Monday, October 20. Based on our analysis, we at eChristianInvesting are expecting NFLX to report better than expected results that beat Wall Street’s recently reduced expectations.

Analyst Expectations

We are forecasting revenues of $345M and EPS of $.32. This would represent a 17% increase in revenues from last year’s $294M in the same period. The current analyst consensus calls for revenues of $342.6M and $.31 EPS. On October 6, the company pre-announced revenue of $337 – 342 million and EPS within the previous guidance range of $0.26 – 0.34.

Until August, business seemed to be going good at Netflix despite the difficult economic climate. Subscriber growth in August came in below expectations as great summer weather undoubtedly caused many to delay subscribing to the service. However, we believe that the investment thesis for this company is still intact.

Netflix offers a low-cost alternative to budget-conscious consumers that should allow it to thrive even in tough economic times. The strong uptick in subscribers in September seems to support that and we also believe the recent $1 per month price increase for Blu-ray subscribers will also provide an added boost for the next few quarters.

Share Performance

To date, Netflix’s shares are down 12%. The company had performed quite well until pre-announcing the disappointing 3^rd quarter results earlier this month. That sent their shares down over 24% in October alone. They still remain one of the better performing stocks this year, having easily outperformed the S&P 500’s dismal 36% loss (YTD).

Valuation

Shares are now trading at only 15x consensus 2009 EPS estimates. This is inline with the relative valuations of their peer group (which have all fallen in recent weeks). However, we continue to believe that Netflix’s superior business model will allow NFLX shares to trade higher in the coming months.

Recommendation: Buy with a $26 price target.