Low Expectations Set Netflix Stock Up for a Post-Earnings Pop

If there’s one company that represents the new dawn of modern media, it’s Netflix (NASDAQ:NFLX). Anyone who had the foresight to buy shares of Netflix stock a few years ago is surely in the green today. But with an earnings event approaching fast, is it time to take profits?

Picture of a person laying on a couch holding a mobile phone that features the Netflix (NFLX) logo on the screen
Source: Alex Ruhl / Shutterstock.com

It’s tempting, no doubt, to take some shares of Netflix off the table after its multi-year run-up. And to be honest, there’s nothing wrong with “knowing when to say when.” After all, an earnings announcement could cause the share price to fall sharply.

As commentators and market participants gear up for the next wave of earnings releases, Netflix is among the most prominent names on the roster. The steaming king’s third-quarter earnings event is scheduled for the afternoon of Oct. 20.

Could there be a reason to hold one’s shares despite the uncertainty surrounding the imminent fiscal data release? If you’re willing to risk it, you might find that muted expectations should (hopefully) work in your favor.

A Closer Look at Netflix Stock

As I alluded to earlier, long-term Netflix stock holders have enjoyed considerable profits. There was a wobbly period in 2018 and 2019, but loyal investors who didn’t get shaken out were rewarded handsomely.

2020, the year of the novel coronavirus, has been particularly generous to Netflix shareholders. The stay-at-home trend clearly benefited the company and its investors. Thus, the price of Netflix shares started the year at around $330 and in mid-October, it’s easily above the $500 level.

That might all sound bullish, but contrarian investors might balk at Netflix’s valuation. It’s definitely worth noting that the stock’s trailing 12-month price-to-earnings ratio is 89.53x. That’s probably not what traditional investors would consider a bargain-priced stock.

On the other hand, we’re not living in a traditional world and 2020 seems to be the exception to every rule our parents and grandparents knew. The onset of the coronavirus has made certain already expensive stocks even more expensive.

Netflix stock would undoubtedly fall into that category. So, as long as the bulls are in control, it’s probably not a great idea to bet against Netflix.

Stifling Bullish Sentiment

All that being said, let’s not assume that everyone’s a raging Netflix bull right now. Interestingly enough, the company itself could be Netflix’s most prominent bear going into earnings.

Okay, I’m exaggerating a bit there. Still, Netflix did provide markedly muted guidance in regard to the its projected third-quarter net new subscriber count.

For the September quarter, Netflix expects to add 2.6 million new subscribers. That might sound like a lot, but a comparison to past quarters should provide some perspective.

Netflix added 15.8 million new subscribers in the March quarter and then added 10.1 million new subscribers in the June quarter. Hence, 2.6 million for the latest quarter wouldn’t be impressive at all.

Subscribers are the lifeblood for a content-streaming company like Netflix. It’s a wellspring of revenues that must be replenished constantly. If the new subscribers are drying up, does this mean that Netflix is in trouble?

Calling Netflix’s Bluff

I have a theory about what’s happening here, and it’s profoundly cynical. Specifically, I suspect that Netflix is deliberately lowballing its forward guidance. It’s a perfect setup for a positive earnings surprise.

Some of the analysts see right through this. For instance, J.P. Morgan analyst Doug Anmuth raised his projection of Netflix’s quarterly net new subscribers from 3.1 million to 5.1 million.

Similarly, Goldman Sachs analyst Heath Terry increased his forecast to 6 million quarterly net new subscribers. While he was at it, Terry hiked his target price on Netflix stock from $600 to a very ambitious $670.

Netflix might be able to fool some retail traders into a dour mood, but the analyst community seems to be calling the company’s bluff. Analysts know full well that in the era of Covid-19 and stay-at-home entertainment, Netflix should have no problem garnering new subscribers.

As Morgan Stanley analyst Benjamin Swinburne put it, “We continue to see short- and long-term benefits to Netflix growth and earnings power due to the changes brought on by the pandemic.”

By the way, Swinburne raised his target price on Netflix stock from $600 to $630. Clearly, Netflix’s modesty didn’t affect his outlook. It shouldn’t affect yours, either.

The Bottom Line

Subscriber count is all-important, and Netflix is bracing investors for bad news on this front. You can hold your Netflix shares through earnings anyway as low expectations seem like more of a pre-announcement strategy than a bona-fide projection.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.

Article printed from InvestorPlace Media, https://investorplace.com/2020/10/low-expectations-set-netflix-stock-up-for-a-post-earnings-pop/.

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