4 Reasons to Buy Netflix Stock Ahead of NFLX’s Q3 Earnings

Multiple data points suggest that Netflix's Q3 numbers will be good enough to spark a big rebound rally by NFLX stock

Once a Wall Street favorite, streaming giant Netflix (NASDAQ:NFLX) has been under tremendous pressure on Wall Street over the past several months. Its worse-than-expected second-quarter numbers reported in mid-July gave credence to the overarching bear thesis on NFLX stock.  Specifically, the bears say that Netflix’s growth outlook is deteriorating as its competition heats up.

Since that earnings report, Netflix stock has shed 20%, falling to $290. Excluding the late 2018 market wipeout, NFLX stock now trades at its lowest levels in about 18 months.

I think this big selloff is an opportunity to buy Netflix stock.  That’s because multiple data points imply that its Q3 numbers will be much better than those awful Q2 numbers. Indeed, it looks like Netflix’s Q3 report will look a lot like every other quarterly report the company has issued over the past few years. If so, that will add credence to the idea that its  bad Q2 numbers were an outlier, not the new norm. Investors will rush back into NFLX stock as that idea gains credibility.

I don’t think the current low  valuation of Netflix stock will last very long. It will probably only continue for another month or so, until NFLX reports strong Q3 numbers. As a result, I think investors have about a month left to buy NFLX stock at a marked discount.

The Downloads of Netflix’s Mobile App Are Accelerating

There are four  major indicators that  NFLX will report much-improved Q3 numbers, boosting NFLX stock. The first of those factors is that the downloads of Netflix’s  mobile apps have significantly re-accelerated in Q3.

Specifically, according to Bank of America Merrill Lynch,  downloads of the mobile apps in  Q3 are up 18% year-over-year, with the popularity of the  domestic app rising 6%  and demand for the  international app jumping 21%. All three of those numbers are significantly higher than the Q2  rates. Also of note,  downloads of Netflix’s app are up 30% in Q3 from Q2.

So downloads of the company’s mobile apps – which slowed meaningfully in Q2 – have re-accelerated in Q3 to more “normal” levels. This implies that the company’s Q3 numbers will be quite good. It also corroborates the thesis that Netflix’s growth outlook is not permanently slowing.

Internet Searches for Netflix Are Accelerating

The second major indication is that global internet searches  related to Netflix have similarly re-accelerated in Q3 to more “normal” levels after a material slowdown in Q2.
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Specifically, according to data from Google Trends, global searches related to NFLX  have jumped over 8% YoY in Q3. That’s up from just 3% YoY search growth in Q2. Importantly, the third quarter’s 8% growth is more consistent with the company’s usual performance.

Thus, Q3 search-interest data indicates that: 1) the large Q2 slowdown has not continued into Q3, and 2) the ugly Q2 report was just a minor road bump  for NDLX stock, while its overall growth outlook remains healthy and non-cyclical.

Management Sounded a Bullish Tone

The third main point is that in mid-July, Netflix’s management was very bullish about Q3 subscriber growth trends and delivered  very strong Q3 guidance.

This is important for two main  reasons. First, when NFLX issued that guidance, the quarter’s hit show – a third season of Stranger Things – had already been released. Presumably, that series was the quarter’s biggest catalyst for subscriber growth. Thus, when management issued the bullish Q3 guidance, it was already largely aware of the impact of Stranger Things on subscriber growth. That impact was clearly positive and was likely a factor behind the bullish guidance.

Second, management has often missed its subscriber net-add targets. But it’s never missed  subscriber net-add targets two quarters in a row. NFLX missed those targets by a wide margin in Q2. History indicates that  NFLX  won’t miss its targets again in Q3.

Netflix’s  Content Lineup Has Been Good

The fourth main idea supporting the notion that Netflix is due to report strong numbers in October, boosting NFLX stock, is that its content has been very good in Q3.

Of course, the headline release in Q3 was the third season of Stranger Things in early July. But that was far from the only hit Netflix released in Q3. In July and August, NFLX released new seasons of  classics Mindhunter13 Reasons Why, and Orange Is the New Black. Netflix also released a Dave Chapelle stand-up comedy routine which has generated tons of buzz, and a Travis Scott documentary which appeared to have been a huge hit among younger viewers.

Thus, Netflix’s content lineup in  Q3 has been very good so far. Indeed, it has been good enough to add credence to the idea that Netflix’s growth outlook is improving.

The Bottom Line on NFLX Stock

I  recommend buying Netflix stock on this dip. NFLX stock is depressed now because the market is concerned that its bad Q2 numbers are the new norm. They aren’t. They are an outlier that will soon be forgotten. Its Q3 numbers will be much better, and when those much better Q3 numbers are reported, NFLX stock will soar as investors embrace the belief that Netflix’s “growth is back.”

As of this writing, Luke Lango was long NFLX stock. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/4-reasons-to-buy-netflix-stock-ahead-of-nflxs-q3-earnings/.

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