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Netflix Investors Could Get a Year-End Bonus

It's been a challenging couple of years for Netflix (NASDAQ: NFLX) investors. After reaching all-time highs in mid-2018, the stock tumbled as much as 40%, driven lower by fears of slowing subscriber growth and the year-end correction that wiped out much of the stock market's gains. The roller-coaster ride continued into this year. After gaining back much of its losses, Netflix has fallen anew on concerns that increasing competition will dent its previously robust growth -- this time for good.

Not everyone agrees with these dire predictions, and recent channel checks by an analyst suggest that Netflix subscriber growth could be more robust in the final quarter of 2019 than many anticipate, which could drive the stock higher going into 2020.

Image source: Getty Images.

Interest is spiking

Analyst Michael Olson of Piper Jaffray analyzed Netflix search engine trends on Alphabet's Google to gauge consumer interest and subscriber levels. Olson found an upward trend during the first two months of the quarter that shows the market may be seriously underestimating the number of new subscribers signing up for Netflix. His analysis suggests that domestic subscribers will increase by 6%, while international subscriptions will climb 30.9%. For comparison, analysts' consensus estimates are calling for domestic and international growth of 4.8% and 29.9%, respectively.

Netflix itself is guiding for subscriber growth to 165.93 million, an increase of 19% year over year. Breaking that down, the company is forecasting domestic subscription growth of 4.6% and international additions of 29.6%. This means that if Olson's calculations are correct, Netflix could end up with 1.8 million more subscribers than it's anticipating.

While Jaffray's "Netflix Navigator" tool -- as it is called -- isn't perfect, Olson notes that it has been "directionally accurate" in forecasting the company's sub growth.

More than one way to judge demand

Another method Olson uses to assess potential subscriber additions is analyzing the number of consumers that view Netflix original content trailers on YouTube. A greater number of views overall is an indication of growing interest and increased demand for the service. Olson found that titles that had at least 3 million trailer views were up 3% year over year during the first two months of the quarter. Excitement among viewers appeared to be growing, driven by interest in programs like The Witcher and El Camino: A Breaking Bad Movie.

Higher demand should continue through the end of the year, as a number of high-profile projects hit the platform in December and are generating significant buzz. The Martin Scorsese gangster epic The Irishman, Noah Baumbach's divorce drama Marriage Story, The Two Popes -- a fictionalized account of the meeting of the two most recent pontiffs -- and biographical comedy Dolemite Is My Name have all won or been nominated for a number of awards, including the Golden Globes. This should give the tech giant additional momentum to close out the year.

Image source: Getty Images.

Not a zero-sum game

With a number of big-name competitors entering the streaming wars, some are predicting the fall of Netflix based on the assumption that viewers will cancel one streaming service in favor of another. Disney's (NYSE: DIS) recently launched Disney+ hit the ground running with 10 million signups last month, and that number has likely doubled since then. Strong demand for the service wasn't a surprise, as Disney debuted with a full library of beloved programming that many grew up with.

An important takeaway from Disney's launch came by way of market intelligence company Apptopia, which tracks the popularity and download data of apps (emphasis mine). "It appears in the early going that Netflix, Amazon Prime Video and [AT&T's] HBO are unaffected by Disney+," the company said in a report. "Looking at U.S. data for these apps, (Disney+ is not globally launched yet), we see download and user session trends uninterrupted from their trend lines."

All things considered, Netflix may be giving investors a holiday bonus, though we won't know until the company reports its quarterly results in mid-January.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares), Netflix, and Walt Disney and has the following options: long January 2021 $85 calls on Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Netflix, and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short January 2020 $130 calls on Walt Disney. The Motley Fool has a disclosure policy.


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