If there’s any company at this juncture that’s a victim of poor timing, it’s Netflix (NASDAQ:NFLX). After a poor showing for its second-quarter earnings report, Netflix stock suffered a sharp decline in the markets. But just as things were getting interesting for the bulls, the major indices had other thoughts.
When the Dow Jones collapsed last Wednesday, the volatility disproportionately impacted the technology sector. NFLX stock was no exception, losing nearly 8% on that day. For the month of October, shares are staring at double-digit losses.
For context, following the Q2 Netflix earnings report, NFLX stock dropped a little over 5%. This isn’t the kind of momentum you want to carry going into a critical Q3 showdown.
And don’t mistake my choice of words for hyperbole: in order for Netflix stock not to see nearer-term technical damage, the underlying company must deliver the goods. Since the broader markets now have legitimate concerns about the consumer economy, the upcoming Netflix stock earnings report has more on the line.
In the last go-around, the online-streaming giant actually produced a solid beat on paper. Against an earnings per share forecast of 79 cents, management delivered 85 cents. However, revenues of $3.91 billion slightly missed consensus estimates calling for $3.94 billion.
But the big issue was subscriber growth. As a momentum play, Netflix stock thrives on user-growth metrics. At 5.15 million new users, this missed both internal and Wall Street estimates of 6.2 million and 6.27 million, respectively.
As InvestorPlace contributor Bret Kenwell stated, “this isn’t a profit story or even a revenue story right now. It’s all about subscribers.” According to Kenwell, its push to create compelling content drove up investor sentiment.
But without the numbers, NFLX stock appears more like an overpriced investment.
Netflix Stock Hinges on Outstanding Results
Because the company isn’t so levered to profitability and growth like other companies, the market will focus on user growth. That said, management can only help its cause with robust beats across all key sectors.
For Q3, consensus estimates call for an EPS of 68 cents. That’s slightly towards the lower end of individual forecasts, which range between 63 cents and 74 cents. In the prior-year quarter, Netflix registered an EPS of 29 cents, missing the 32-cent consensus target.
Given its recent earnings performances, Netflix should at least meet its earnings goal. After all, we don’t see NFLX stock miss that frequently. However, Q3 has been a historical sour point. Since 2015, the company has missed twice and beat once. Needless to say, management can’t give up freebies here.
On the revenue side, the Street anticipates NFLX to ring up $4 billion. Individual estimates are much tighter for this metric, ranging between $4 billion to $4.1 billion. In the year-ago level, Netflix recorded sales just under $3 billion.
Should management get through these hurdles, they must next come through on the most important number. In the last earnings conference call, NFLX executives guided down new subscribers to five million. That was one million short of analysts’ consensus forecast, which deeply hurt Netflix stock.
Naturally, shareholders are anxious ahead of Q3 because they can’t afford another repeat performance. That said, I believe Netflix has what it takes to produce a necessary beat across all cylinders.
First, it’s highly unusual for the streaming giant to miss twice in a row. In the long run, we’ll probably look back at Q2 and realize we overreacted for a blip on the radar. Second, Netflix has gained traction in its international pursuits with compelling content.
Look at NFLX Stock as a Longer-Term Investment
Of course, with such a bad miss on the last Netflix earnings report, the markets are placing undue pressure for an immediate turnaround. Even if we see that reversal, the broader market weakness could still hurt NFLX stock.
But I encourage readers to look at Netflix stock as a longer-term play, and not just as a quick trade. We know that the U.S. market is saturated. For NFLX, and even media giants like Disney (NYSE:DIS) and Comcast (NASDAQ:CMCSA), to succeed in the 21st century will require relevant content that engages with audiences.
I’ve argued in the past that the streaming company has accomplished exactly that. The most recent Emmys award show — in which Netflix cleaned house — confirms this point.
The other point that investors should consider is content diversity. We’re no longer in an era where western audiences rule. Now, the lucrative markets are in places like China and India.
Media institutions like the Comcast-owned NBC don’t seem to understand that appealing to a wider audience requires hiring from a wider talent pool. Netflix, though, was born into this next-generation ethos. Their content generally features more diversity and inclusion.
That’s a critical advantage as the company markets itself to the non-western world. However, this advantage can’t be actualized over one quarter. But give Netflix stock time, and those user metrics will surely rise (along with everything else).
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
