Heading into the final quarter of the year, Netflix (NASDAQ:NFLX) investors have to like where they stand. The stock is trouncing the broader market with an over 40% gain so far in 2017 as the streaming video giant’s market capitalization reaches toward $80 billion — up from $25 billion less than three years ago.
Sharp gains like that imply shareholders will face plenty of volatility in the months ahead as Wall Street looks for reasons to continue — or end — the rally.
Below, we’ll look at the key events in October that might have a significant impact on this surging stock.
The company announces its fiscal third-quarter earnings results after the market closes on Oct. 16, which means shares could swing wildly over the following trading days. Expectations are high heading into this report, given that Netflix trounced management’s growth guidance over the past few quarters. Instead of slowing to an 8 million user pace, new member additions are up 21% so far in 2017, to over 10 million.
Netflix is also enjoying solid profit growth, with operating margin marching toward management’s 7% goal to nearly double 2016’s result.
CEO Reed Hastings and his executive team considered their last few prediction misses when they put together the official third-quarter outlook. That helps explain why management is forecasting a healthy acceleration in subscriber gains in both its U.S. and international segments. Specifically, the domestic market should add 750,000 users, compared to a 370,000 member increase last year. Executives’ best guess puts international additions at 3.65 million, up from 3.2 million in the year-ago period. Altogether, Netflix is aiming to increase its subscriber rolls by 4.4 million to cross 100 million members.
Even if it achieves that impressive result, investors could punish the stock in reaction to the company’s forecast for the next quarter. Netflix added a massive 7 million users in last year’s fourth quarter to create a high bar to vault this time around.
The company’s growth rate is mainly a function of the fresh content it brings to the service. Last quarter’s surprising member spike, for example, was powered by a release pipeline that included 14 new seasons of original shows and nine exclusive feature films. In trying to explain why management had been so wrong about their subscriber prediction, executives admitted, “we underestimated the popularity of our strong slate of content which led to a higher-than expected [customer] acquisition across all major territories.”
The company takes a stab at extending its content lead when it releases the second season of the sci-fi series Stranger Things on Oct. 27. That show was a huge surprise hit last summer and it played a big role in the company’s trouncing growth expectations in 2017. Netflix has a bigger, more diverse membership base today, and so it is getting harder to move the needle with any single release. On the other hand, Stranger Things benefits from a huge built-in audience and an already established brand. Thus, Netflix’s servers are likely to be stressed when the show’s second season becomes available worldwide late in the month.
Hastings has told investors that he’s aiming to produce many more hits like Stranger Things. That kind of fresh content doesn’t always resonate with audiences, though, so Netflix will likely launch its share of flops that don’t make it past their first season. The original content focus also ensures the company will burn through cash even as the membership base increases. Ideally, those significant drawbacks will be offset by the occasional breakout hit that elevates Netflix’s brand.