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Buy Netflix before earnings because subscriber growth will top Street: UBS

  • UBS tells its clients Netflix will report third-quarter subscriber growth above expectations later this month.
  • Netflix shares are crushing the market this year, up 45 percent year-to-date through Tuesday.
  • The streaming giant is set to release a "very strong" host of new content, including renewals of popular shows including "Stranger Things" and "The Crown" as well as eight new original dramas.

Even though Netflix is one of the market's best-performing stocks this year, one Wall Street firm continues to recommend the streaming video giant's shares ahead of its earnings report.

UBS told its clients the company will report third-quarter subscriber growth above expectations later this month.

"We see upside to third-quarter guidance based on our analysis suggesting subscriber growth momentum has sustained into the third-quarter with broad-based year-over-year improvements across almost all markets," wrote UBS analyst Doug Mitchelson. "Based on the lackluster stock performance this quarter and investor expectations for an in-line quarter, we see near-term upside to shares."

Shares of Netflix jumped 3.5 percent Wednesday after the report. The company is slated to report third-quarter earnings results on October 16, according to its website.

The analyst raised his price target on Netflix to $225, which is 26 percent higher than Tuesday's closing price. The old target was $190. UBS also raised its third-quarter estimates on U.S. net additions to 100,000 and international additions to 300,000, pushing total second-half net addition estimates to about 1 million above Wall Street consensus.

Since highs in July, Netflix shares have fallen about 4 percent, a dip Mitchelson attributes to a recent lack of compelling original content compared to last year's third quarter. Netflix remains one of the strongest stocks this year, up 45 percent since January.

"We see 3Q17 as a tougher year-over-year comparison as 1) no "Stranger Things," 2) five fewer dramas, and 3) no apparent new smash hits," explained the analyst. But looking ahead to the fourth quarter, Netflix may have more reason to celebrate.

It is set to release "very strong" new content, the analyst said, including renewals of popular shows "Stranger Things" and "The Crown" as well as eight new original dramas. Netflix also revealed a new slate of anime originals and made its first acquisition by buying Millarworld, a comic book publishing company responsible for franchises including "Kingsman: The Secret Service" and "Wanted."

The original content is what has "played a crucial role" in the company's subscriber growth, he said.

Still, investors may be hesitant to acquire more shares of Netflix with fears of competition looming.

Many have turned to streaming services by rivals Hulu and Amazon, which announced plans to expand its streaming service into India with Italy, Spain and France potentially next, according to an earlier UBS report. News that Disney will be withdrawing key content and launching its own global service also dampened Netflix shares briefly.

— CNBC's Michael Bloom contributed to this story.