The past year has been a bumpy one for Netflix (NASDAQ:NFLX). A jittery market and concerns about whether or not the firm will be able to continue growing its subscriber numbers as it has done in the past has sent NFLX on a rollercoaster ride. Despite the fact Netflix stock lost nearly half of its value between July and December of last year, NFLX was still able to deliver a 30% upside to investors who held on to their shares for the duration of the year.
Since the beginning of 2019, NFLX has been making a recovery from its sharp loss back in December. After yesterday’s rally, it’s up an astounding 30% in just two weeks! However, with fourth-quarter earnings due out on Thursday, many are wondering whether they should be buying or selling Netflix stock. Analyst upgrades have amped up investor sentiment ahead of the release, but management has warned that there are still some headwinds to watch out for.
Here’s a look at what to expect from NFLX’s upcoming earnings release.
Analyst Upgrades for NFLX Stock
The past week has been peppered with positive press regarding Netflix stock. Raymond James and UBS both issued upgrades on the stock ahead of the company’s fourth quarter earnings release and a research note for Stifel Nicolaus predicted fourth quarter subscriber numbers coming in ahead of expectations.
The Stifel note said that in December, Netflix’s search interest was at a 5-year high both in the U.S. and globally. With that in mind, the analyst believes that the increased interest in Netflix content will have translated into new subscriptions and thus better than expected subscriber numbers in the end-of-year quarter.
However, it’s worth mentioning that not everyone believes that increased search activity equals more subscribers. Analysts at JPMorgan noted that although Q4 is likely Netflix’s strongest content-wise, the popular new titles were released too late in the quarter to have improved the firm’s net additions. JPM analysts believe Q4 paid net additions will come in below management’s already cautious guidance of 1.28 million in the U.S. and 5.97 million internationally.
The Adds Add Up
Netflix stock’s success or failure following its earnings release really depends on whether or not the firm is able to hit those new subscriber numbers. At very least, the firm will have to hit management’s low-ball numbers — but investors will be looking for a beat on this metric, especially after all the enthusiastic press the stock has received. Including both paid and free-trial subscriptions, NFLX needs to have acquired 9.4 million net new members to satisfy investors’ expectations.
What Else to Watch
Outside of the subscriber numbers, investors will also look to Netflix’s revenue growth. Analysts are expecting to see fourth quarter revenue come in at $4.21 billion, representing 28% growth from the year-ago quarter. Profitability, on the other hand, is expected to take a hit as spending on new content ate into margins.
(The subscription-price hike, announced yesterday, of course came too late to affect Q4 numbers.)
The Long-Term Case for NFLX
There’s a lot of pressure on NFLX this week with earnings on the horizon and any missteps could lead to another decline for the stock — especially since the stock shot up 6% yesterday. However, investors might want to use an earnings miss as a buying opportunity because the bottom line is that the long-term growth story for Netflix stock is still intact.
The company’s aggressive investment in its original content is paying off — that’s evident by the high search volume for NFLX content. Within a week of releasing Bird Box, 45 million people had watched the thriller — making it the most successful original film the firm has ever released. Netflix knows how to create content that people want to watch, which is the key for long-term success. Not only does it give subscribers a reason to renew their membership, it attracts big name directors and actors for future projects.
Plus, Netflix content is being recognized in Hollywood. The firm won 5 Golden Globes earlier this month. That’s a big deal because no other network or streaming service came away from the ceremony as successful. That kind of recognition proves beyond a doubt that NFLX is a force to be reckoned with in both film and TV.
Additionally, yesterday’s announcement shows that Netflix is confident that subscribers will continue to pay increased prices for this original content.
The Bottom Line
NFLX stock has the potential to make its way above $400 again over the next few months, but I’m not convinced that the Q4 results can live up to expectations.
Although the firm was able to put out some impressive content during the quarter, I think JPM’s hypothesis that it was too late in the quarter to make a sizable impact on new additions is probably true. With investors already jittery and a shaky market, I wouldn’t be surprised to see a slight earnings misstep hurting NFLX stock.
However, investors should consider using a post-earnings slump as a buying opportunity because whether Q4 meets expectations or not, Netflix stock is a great long-term play.
As of this writing Laura Hoy was long NFLX.
