Upcoming Earnings Look Huge for Netflix Stock

The importance of earnings reports can be overstated, but Netflix's Q2 report is likely to be critical for NFLX stock

When it comes to a stock like Netflix (NASDAQ:NFLX), quarterly earnings can receive a little too much hype. NFLX stock, after all, isn’t really an argument over what happened in the first quarter of 2019. It’s an argument, broadly speaking, over what the internet video landscape will look like in 2025, and 2035.

Upcoming Earnings Look Huge for Netflix Stock
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But earnings reports can change those projections. If Netflix’s subscriber growth suddenly stops, that might suggest less popularity and lower profits for years to come. But when it comes to half a million subscribers in one quarter, or a few pennies’ worth of earnings per share in another, short-term factors simply don’t matter as much as some in the media and some owners of NFLX stock believe.

Indeed, for all the hype over Netflix’s recent earnings reports, NFLX stock has traded mostly sideways for the last year, and, in total, it actually has declined about 5.6% over that period. NFLX stock did plunge in December, but that was caused by the market’s problems, not a NFLX issue. The stock recovered quickly and until its recent, modest rally, it had mostly traded sideways for some time.

But the company’s second-quarter earnings report, due on Wednesday, July 17, in the afternoon, looks more important than any from the streaming giant in a while. NFLX stock is trying to break out. More competition is on the way. And investors weren’t really thrilled with the company’s Q2 guidance. Strong Q2 results would put Netflix stock in a good position as the streaming wars heat up. Any sign of weakness, however, would leave NFLX stock looking potentially vulnerable.

NFLX Stock Faces Resistance

From a technical standpoint, NFLX stock is trying to break out. The stock has posted a nice gain  of roughly 12% over the last three weeks or so, and at $384, it’s back at resistance that’s held several times before. Netflix stock hit this level in early May and quickly fell. It did the same in early October and again fell after reporting strong Q3 earnings in mid-October,  It then proceeded to plunge over 35% in less than three months.

If Netflix stock again fails to clear those levels, it’s not necessarily a death knell. A repeat of December’s declines likely isn’t in the cards, barring another a market downturn or a disastrous Q2 report. But Netflix stock has one of the highest valuations among mega-cap names; if its resistance holds again, that could be a near-term/mid-term signal that investors have a maximum price that they’re willing to pay to buy Netflix stock.

Q2 Expectations Might Be Low

I wrote in April that Netflix’s had a “good news, bad news” quarter in Q1. The good news was a big Q1 beat. The bad news was disappointing  Q2 guidance.

The split was most noticeable in terms of net subscriber adds. Netflix picked up 9.6 million subscribers worldwide in Q1. It estimated that it would add  just 5 million subscribers in Q2, which was lower than Wall Street analysts, on average, had expected.

And at the end of the day, NFLX still is a subscriber story, as I argued a year ago. Again, NFLX stock is valued based on the profits that supposedly sticky subscribers can generate for years, particularly if the company can cut the growth of its constantly skyrocketing content spending.

Netflix needs to hit, and likely beat, its Q2 subscriber guidance. The guidance was disappointing to begin with. Something like 3-4 million net adds is not good enough. That type of performance would lead investors to wonder if its growth is slowing. It would raise doubts as to whether NFLX’s cash burn really is going to peak this year, as the company has predicted.

Netflix’s new series,  Stranger Things is breaking viewership records, so Netflix will have no excuse if its outlook for U.S. subscribers, in particular, is subpar.

If $15 billion of content spending just this year can’t drive subscriber growth, the question becomes: what can? If investors and analysts are asking that question, that’s bad news for Netflix stock.

The Competitive Threat

That’s doubly true right now because more competition is on the way. Right now, Netflix’s key competitors are Hulu, majority owned by Disney (NYSE:DIS), and Amazon.com (NASDAQ:AMZN). Neither rival has developed a service with the breadth and depth of Netflix.

That’s going to change. Disney’s streaming service is coming later this year. AT&T (NYSE:T), through its WarnerMedia unit, will roll out the newly named “HBO Max” next year. It’s backing that launch by taking back Friends, Netflix’s #2 show. NBCUniversal, a Comcast (NASDAQ:CMCSA) unit, has its own streaming plans as well.

Ahead of the Disney launch, in particular, two very different narratives can emerge from Netflix’s earnings. Another big subscriber beat would suggest that Netflix  might be too big for its competitors to budge, particularly among higher-income U.S. consumers. If it misses average expectations,the foundation under NFLX stock would start to crack. Investors would start questioning the company’s outlook,

Among the questions that would be asked: Are consumers waiting for Disney+? Do cable operators have more heft among older consumers than investors realized? If Netflix’s U.S. adds are slowing ahead of this competition, will NFLX start losing American subscribers when the new competitors arrive?

Netflix Stock Will Move

All told, the Q2 results will probably be important for Netflix stock. Interestingly, the options market reflects that view. NFLX options that expire next week currently price in about a 7.5% move by NFLX stock. That’s a reasonably high figure for a $150 billion market cap stock.

Honestly, Netflix stock might move more than 7.5% in the wake of its results. This report is going to be dissected because Netflix is about to enter a key stretch. It has to manage its new competition. It has to at least start trimming its free cash flow losses. Its road to subscriber growth in the U.S. will get incrementally more difficult simply because its existing reach is so large.

All told, I’d expect fireworks from Netflix stock next week and beyond. Wednesday’s report could set the direction of NFLX stock for months to come.

As of this writing, Vince Martin has no positions in any securities mentioned.

Article printed from InvestorPlace Media, https://investorplace.com/2019/07/upcoming-earnings-look-huge-for-netflix-stock/.

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