Netflix Inc. has a tough task when it reports fourth-quarter results on Jan. 17, after the market close — satisfy investor expectations that are running high, and accelerating.
When the streaming video giant faced a similar task, it failed. But there’s reason to believe this time will be different.
Helping fuel the optimism was the December release of the movie “Bird Box,” starring Sandra Bullock, which was viewed by a record 45 million subscribers in the first week.
And on Friday, Raymond James analyst Justin Patterson upgraded Netflix to strong buy from outperform on Friday, saying the company’s content investments and film strategy are “paving the way to material profitability.” He boosted his stock price target to $450 from $435, implying a further rally of 33% from current levels.
The last time investors were so optimistic ahead of results was July 2018. The stock had run up over 40% to a record high in three months just prior to the earnings release.
Just as investors’ expectations were at their highest, UBS downgraded Netflix to neutral from buy, with analyst Eric Sheridan has said the long-term growth potential was already reflected in the stock price, but the risks associated with competition and free cash flow burn were not.
He was right to temper enthusiasm, as a week later, Netflix beat profit expectations but misses on revenue and the all-important subscriber additions sent the stock tumbling. Read more about Netflix’s Q2 earnings.
Then a week before third-quarter results, Sheridan said his research suggested domestic subscriber additions were likely to beat expectations, but the stock’s risk-reward profile suggested it was still too early to buy.
He was right again. The stock surged on Oct. 17 after Netflix beat subscriber numbers by a wide margin, but the downtrend resumed the very next day.
The good news is, a week before fourth-quarter results, UBS’s Sheridan upgraded Netflix back to buy, citing strong subscriber numbers and a clearer understanding by investors on Netflix’s challenges.
If he was right the last two quarters, will the third time also be a charm?
Here’s what to expect:
Subscriber growth: The 11 analysts providing estimates to FactSet are expecting, on average, total net subscriber additions of 9.2 million, up from 8.3 million a year ago. In October, the company guided for total net additions to rise to 9.4 million.
Netflix beat net adds expectations last quarter, and for five of the past six quarters.
Earnings: The FactSet consensus for earnings per share is 25 cents, down from 41 cents a year ago.
Estimize, a crowdsourcing platform that gathers estimates from Wall Street analysts, as well as buy-side analysts, hedge-fund managers, company executives, academics and others, has calculated a consensus EPS estimate of 34 cents.
The company has beat the FactSet EPS consensus the past four quarters, and for the 10 of the past 12 quarters.
Revenue: The FactSet revenue consensus is $4.21 billion, up from $3.29 billion a year ago, and in line with the company’s guidance of $4.199 billion. Estimize is projecting revenue of $4.23 billion.
The FactSet consensus for domestic streaming revenue is $2.00 billion, for international streaming is $2.13 billion and for domestic DVD is $84.6 million.
Netflix beat third-quarter revenue expectations, and has beat for seven of the past nine quarters.
Stock price: The stock’s rally from Christmas Eve followed a 44% sinking from the July 9 record close of $418.97 to the Dec. 24 low of $233.88.
Despite that selloff, the stock has run up 56% over the past 12 months, making it the best performer over that period of the so-called “FAANG” stocks, which includes Facebook Inc.
and Google parent Alphabet Inc.
The average rating of the 41 analysts surveyed by FactSet is the equivalent of overweight, while the average price target is $389.48.
The stock’s post-earnings performance has been mixed. Over the past 20 quarters, it has gained the day after 11 quarterly reports, by an average of 12.5%, and declined after nine, by an average of 7.5%, according to FactSet data.
An options strategy known as a “straddle,” which is a pure volatility play involving the simultaneous purchase of bullish and bearish options at the same strike price, is priced for a one-day post-earnings move of 10.2% in either direction.
Looking ahead: The key to how the stock performs post-earnings could be the company’s guidance for the first quarter.
• Subscriber additions: Two analyst providing FactSet with estimates for total net subscriber additions ranged from 7.50 million from 7.96 million, compared with 7.41 million the year before.
• EPS: 86 cents. The FactSet consensus has fallen from 88 cents as of Dec. 31, and from $1.04 as of Sept. 28.
• Revenue: $4.59 billion. The FactSet consensus has declined from $4.60 billion at the end of December, but has inched up from $5.82 billion at the end of September.