Tuesday, October 16, 2018

Optimism Surrounding Netflix's Third Quarter Earnings Report

  • Stocks
  • US earnings' season

During the past two trading days, Netflix’s stock price was able to rise by 3.7% while the S&P 500 and Nasdaq 100 rose by only 0.82% and 1.5% respectively. This over-performance is indicative of investors’ positive sentiment going into today’s earnings release. The optimism surrounding Netflix is also attributed to several positive comments from different analysts.

Michael Olson and his Piper Jaffray analyst team said, following July’s disappointing earnings release, that “the long-term potential is too great for us to suggest anything other than buying Netflix on today’s weakness.” Most recently, Cowen analysts, led by John Blackledge said that they view Netflix as a pioneer in online streaming and further growth is expected in the U.S and international markets. Moreover, Imperial Capital analyst David Miller made an interesting remark last week by stating that the reports of Netflix testing ways to bypass Apple’s app store overseas signifies that this quarter’s international subscriber growth will be strong.

Keep in mind that lack of subscriber growth was the main reason behind the stock’s fall following the second quarter earnings report and proof that subscriber growth might be strong this time is of great value. Earlier this month, Evercore ISI raised Netflix’s target price from $320 to $350 as SensorTower data revealed that international downloads of the Netflix app numbered more than 40 million in the third quarter alone (Toy, MarketWatch). This is significant given that the market is currently expecting a net change in subscribers of 5.32 million only. Finally, Citi altered Netflix’s rating from neutral to a buy, stating that the recent stock market sell-off provides investors with an “opportunity to own a high-quality, recurring revenue franchise with attractive upside potential.”

To sum it all up, investors need to focus mostly on the subscriber growth figure as it is perceived to be the biggest driver of Netflix’s valuation. The current subscriber growth consensus according to FactSet is set at 5.32 million. In terms of earnings per share and revenue, analysts polled by FactSet expect $0.68 and $3.9 billion respectively.

From a technical standpoint, Netflix's stock price has recently failed to break below the 200-period moving average signaling the existence of strong bullish sentiment surrounding the stock.