Google Trends is a surprisingly good way to predict Netflix subscriber growth

Senior Writer
Yahoo Finance

Netflix (NFLX) stock watchers are constantly trying to evaluate the company’s subscription growth. As an ad-free streaming company, subscriptions – which begin at $7.99 a month – are the chief source of revenue.

In a research note circulated Monday, Piper Jaffray detailed its analysis of Netflix (NFLX) and explained exactly how it models subscriber growth. Instead of complicated proprietary systems, the analysts revealed a surprisingly simple method: tracking Netflix and Google searches.

Piper Jaffray noted that subscription growth and Google searches for Netflix were correlated with an uncanny closeness. Over 21 quarters, the two sets had a 0.93 to 0.94 correlation coefficient. A coefficient of 1 would mean complete lockstep.)

There’s a spike on Google Trends for Netflix searches, a sign that subscriber numbers will rise. (Google screenshot)
There’s a spike on Google Trends for Netflix searches, a sign that subscriber numbers will rise. (Google screenshot)

The note didn’t specify exactly the search terms tracked — it could be Netflix, show names, or other related terms — but it’s an interesting insight of how analysts use the information available.

Piper Jaffray analysts don’t just use Google search to determine new subscription modeling, which is why they are projecting lower numbers than what the search trends indicate. Currently, they’re modeling growth of 9% domestic subscriptions and 39% for international subscriptions for year-over-year growth in the last quarter, which is lower than the growth of search interest.

Piper Jaffray analysts hedged strongly against taking these numbers as gospel, citing the error inherent in the relationship. Though the historical error isn’t not particularly high – around 4% domestically and 11% internationally – the analysts noted it’s better to interpret the searches as an indication of general trends and not an exact one to one comparison. On the strength of that, the analysts slapped an overweight label on the stock with a $240 price target. At closing on Monday, the stock was at $212.

Ethan Wolff-Mann is a writer at Yahoo Finance. Follow him on Twitter @ewolffmann. Confidential tip line: FinanceTips[at]oath[.com].

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