When it comes to global streaming giant Netflix (NASDAQ:NFLX), the only number that matters is the subscribers number. If net subscriber additions surpass expectations, Netflix stock soars. If net adds fall short of expectations, the stock drops. It’s that simple.
Last quarter, Netflix’s subscriber numbers fell short of expectations, by a mile. NFLX stock tanked. It’s been tanking ever since. Now, with shares down more than 20% from where they were prior to last quarter’s print, Netflix is set to report earnings again.
Many investors and analysts see this as a make-or-break earnings report for Netflix. Competition is coming. Change is coming. Bad numbers will add credence to the thesis that this competition and change are set to derail the Netflix growth narrative, and NFLX stock will tank.
Strong numbers will add credence to the thesis that Netflix will remain resilient to this competition and change, and NFLX stock will bounce back in a big way.
The big question on everyone’s mind now – which will happen? Will Netflix report another disastrous quarter? Or will Netflix earnings knock it out of the park?
I think the latter. Here’s why.
The Data Implies Good Things
There are two big reasons why I think Netflix earnings will be strong enough to support a rally. The first is that the data implies that Q2’s weakness, didn’t repeat in Q3, and that the international business (which is where all the growth comes from) is firing on all cylinders. See as follows:
- Domestic search interest trends for Netflix deteriorated in Q3, but international search trends improved significantly. According to data from Google Trends, Netflix’s year-over-year domestic search interest growth rates tumbled in Q3 to 1.9%, versus 3.3% in Q2, and 6.2% in 2018. But, Netflix’s worldwide search interest growth rates improved in Q3 to 7.8%, versus 2.7% in Q2.
- International web and app traffic data improved meaningfully in Q3. According to data from SimilarWeb, international daily web and app active usage grew 25% year-over-year and 11% sequentially in Q3 – after being essentially flat sequentially in Q2. At the same time, data from SensorTower similarly shows that Netflix’s global app growth rates re-accelerated higher in Q3, after being sluggish in Q2.
Broadly, then, the implication here is that while Netflix may report another quarter of sluggish domestic sub growth, the company’s international numbers will impress this quarter, and lead to an overall beat in subnet adds – which should power a big bounce-back rally in Netflix stock.
The Fundamentals Imply Good Things
The second big reason I’m bullish on NFLX stock ahead of the Q3 earnings report is because the qualitative story backs up the strong quantitative data.
In a nutshell, here’s what happened in the quarter. The quarter got off to a strong start with the third installment of Stranger Things in early July, which led to management giving its strong Q3 guide in the middle of July, despite the sharp Q2 miss.
In late July, August, and September, there was some subscriber turbulence domestically (mostly derived from subs threatening to quit Netflix thanks to the platform canceling The OA). But, that turbulence was largely offset by strong showings from new season of Netflix fan favorites Orange Is The New Black and Mindhunter, as well as a surprise home run hit in the original drama series Unbelievable.
The international film slate was also very good in the quarter, headlined by the second season of Elite, and that likely helped support a rebound in international growth trends.
Big picture – it wasn’t a perfect quarter, but it was a good quarter. Importantly, it was a much better quarter than what Netflix reported three months ago. A much better quarter should inject confidence back into the investor base, and this renewed confidence should provide support for a nice post-earnings rally in NFLX stock.
Bottom Line on Netflix Stock
There’s a lot of concern out there that the Netflix growth narrative is falling apart. Those concerns are presently overstated because Q2 numbers from Netflix were awful. But, Q3 numbers should be a lot better, and these overstated “Netflix apocalypse” concerns will consequently back off following the Q3 print.
As they do, NFLX stock will rebound from its recent sell-off.
As of this writing, Luke Lango was long NFLX.
