Netflix Inc (NFLX) Q4 2015 Earnings Preview: Could Weak US Subscriber Growth Be A Stock ‘Murderer’?

Netflix subscribers were riveted last month by the 10-part documentary “Making a Murderer,” which followed the bizarre saga of Steven Avery, a Wisconsin junk dealer who was convicted of sexual assault and exonerated 18 years later, only to be convicted again for murder. It was a gripping whodunit, but it perhaps pales in comparison to an even bigger TV mystery: How many new viewers can Netflix continue to attract?

The video-streaming giant will report fourth-quarter earnings Tuesday amid concern that its domestic user base is not growing at the rate that the company or investors want. Wall Street expects Netflix to add 1.62 million U.S. subscribers for the three-month period that ended Dec. 31. But some analysts are now saying that Netflix may not reach that benchmark. Earlier this week, Netflix shares fell 10 percent after the financial firm ITG lowered its estimates on U.S. subscriber growth to 1.13 million net additions, versus Netflix’s own guidance of 1.3 million. Reaction to that seemingly inconsequential prognosis is further proof that Netflix’s domestic growth is still a critical metric for the TV streaming giant. Even as it aggressively expands its global footprint, including a surprise launch in more than 130 new countries announced at the Consumer Electronics Show in Las Vegas last week, Netflix’s stateside base still matters.

On the international front, analysts expect Netflix to add 3.5 million subscribers, buoyed by launches in Italy, Portugal and Spain. Combined, Netflix’s total base could top 74 million global users in the fourth quarter. In the same period last year, Netflix added 2.43 million international subscribers and 1.9 million domestic, for a total of 4.33 million.

Netflix’s expansion ambitions, and its investments in original content, are coming at the expense of profits. Analysts polled by Thomson Reuters expect Netflix to post fourth-quarter net income of $9.6 million, or 2 cents per share, a significant decrease from $83.37 million, or 19 cents per share, for the same three-month period last year. Revenue is expected to rise 22.9 percent to $1.8 billion.

Still, no one wants a repeat of Netflix’s previous earnings report. Three months ago, Netflix missed U.S. subscriber estimates, adding only 880,000 compared to a forecast of 1.15 million, and shares took a vicious tumble as a result. Reed Hastings, the company’s chief executive, blamed the miss on the transition to chip-based credit cards, which he said impeded Netflix’s ability to collect some fees. “Involuntary churn,” was the term Hastings used to describe the phenomenon.

Tuesday’s earnings call could reveal just how involuntary — or not — that churn really was. If Netflix is unable to deliver growth that matches Wall Street’s projections, Hastings and company could have a problem. As it stands, the company is facing increasing competition from the likes of Hulu, Amazon Prime and other emerging players in TV streaming, an area it once had effectively all to itself. Adding to that pressure is festering discontent from media companies over the perception that they have licensed their movies and TV shows to Netflix at too low a price. Investor conferences this past fall were abuzz with talk from media executives vowing to rethink their streaming deals.

Analysts say that could impact Netflix’s ability to maintain is library. “Netflix’s long-term ability to license off-network hit content from traditional media companies looks to be increasingly challenged,” Michael Nathanson, a media analyst with MoffettNathanson, noted in an October research note.

That said, Netflix by most accounts continues to make strides in areas that are more difficult to quantify. In addition to “Making a Murderer,” the company has released a number of critically acclaimed, crowd-pleasing series over the last few months, including the Aziz Ansari comedy “Master of None” and “Marvel’s Jessica Jones.”

Laura Martin, an analyst at Needham, said in a research note this month that Netflix has emerged as a formidable pipeline for premium content, and the value of that content shouldn’t be understated. “Netflix was nominated for 34 Emmys in 2015,” she wrote, “implying that Netflix can attract talent and create content comparable to HBO and Showtime.”

Netflix will report fourth-quarter 2015 financial results on Tuesday after the markets close. A conference call with Hastings, the company’s chief executive, is planned for 5 p.m. EDT.

Correction: An earlier version of this article incorrectly stated that Netflix reported 4.33 million new U.S. subscribers a year ago, indicating a more significant slowdown in U.S. growth. It was 4.33 million global subscribers, not domestic. Netflix reported 1.9 million U.S. subscribers a year ago.