Netflix, Inc. (NFLX) earnings land early next week, and the market and shareholders are bracing for the possibility of another violent selloff in Netflix stock, hurt by dwindling subscriber growth and bumpy international expansion.
It’s more of the same-old, same-old for Netflix stock, where the costly ramp-up of the international business has yet to make up for a domestic segment that isn’t growing anywhere near what it used to.
True, Netflix stock is starting to garner more support on Wall Street for its ever-growing library of original content. Stifel Nicolaus recently upgraded Netflix stock to “buy” from “hold,” citing the strongest lineup of original content in its history.
From Better Call Saul, to four different superhero series from Marvel to a new series by the brothers behind The Matrix, NFLX looks ready to enter a new era of driving growth. As Stifel Nicolaus said in a note to clients:
“While the company continues to experience a transition between slowing subscriber growth in the profitable U.S. segment and international expansion, we believe shares in the low-$300 range provide a compelling risk-to-reward ratio given the strong content cycle.”
That, however, is a 2015 tailwind for Netflix stock, and won’t take any sting out of upcoming Netflix earnings. If anything, Netflix earnings should provide excuses for at least some brief selling pressure in Netflix stock.
Netflix Stock Hurt By Costs, Slower Growth
For one thing, Netflix has already warned of a third-straight quarter of dwindling subscriber growth. Furthermore, earnings are expected to drop sharply on a per-share basis.
For the most recent quarter, analysts, on average, expect Netflix earnings to fall to 45 cents per share from 79 cents a year ago, according to a survey by Thomson Reuters. Revenue growth for the period is projected to be explosive once again, rising more than 25% to nearly $1.5 billion.
That divergence between the top and bottom lines helps explain the volatility and disappointing returns of Netflix stock over the last year. NFLX cratered in October just like the rest of the market, but it never bounced back. Indeed, Netflix stock has fallen another 10% since its October drop, ending 2014 with a loss of more than 7%.
If the Netflix bulls like Stifel Nicolaus are correct, any drop in Netflix stock following results is likely a buying opportunity. Stifel Nicolaus says NFLX could drop anywhere from 10% to 15% after earnings, but the rest of 2015 looks too good to ignore.
In addition to new original series and the return of hits like House of Cards and Orange Is the New Black, Netflix will premiere its first original movie — Crouching Tiger 2 — in August. International growth should also rev up, thanks to fairly recent launches of the service in Western Europe, notably France, Germany and Switzerland.
Whatever the outcome of Netflix earnings report, traders will welcome the volatility and at least some investors will see any selloff as chance to get shares on the cheap. If you can stomach the risks of high-growth momentum stock like NFLX, go for it.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
