Netflix Q2 Earnings Preview: Investors Will Look To Justify Stock's 60% Jump

So far this year, Netflix shares are up nearly 60%, making it one of the best S&P 500 performers as well, though the index itself is weaker by about 3% year-to-date. The stock, which closed yesterday at $523.25, has also gained about 70% off its March low, in a rally that pushed shares to a new record high earlier this month.

That strength will come under scrutiny tomorrow when the Los Gatos, Calif.-based streaming giant releases its second quarter earnings as investors seek to justify this impressive run in shares and the sustainability of the pandemic-driven boost.

On this front the company’s latest earnings guidance sent a mixed message, leaving some room for a negative surprise.

“Like other home-entertainment services, we’re seeing temporarily higher viewing and increased membership growth,” the company said in a letter to investors in late April when Q1 earnings were being reported.

“We expect viewing to decline and membership growth to decelerate as home confinement ends.”

By adding a record 15.8 million subscribers in the last quarter, Netflix showed it was the first choice for billions of people stuck in lockdown, many of whom were binge-watching such original Netflix programs as “Tiger King” and “Love Is Blind” to ride out the quarantine.

All this, in our view, is already fully priced in. We believe, therefore, that the stock's rally could pause, as investors wait to see whether subscribers keep their connections when countries reopen and users go about their daily lives.

Some Wall Street analysts have similar views on Netflix after its impressive rally. UBS, in a note to clients this week, said while the firm expects to see “a widespread benefit” from the pandemic favoring indoor entertainment options, the advantages from this trend appear priced in at current levels.

“Investor fears seem to have disappeared and the current stock price increasingly reflects many of the long-term business moat dynamics,” analyst Eric Sheridan wrote, reiterating his $535 price target. While the company’s long-term narrative remains intact, “we would rather be constructive at levels when a mix of potential subscriber volatility, FCF dynamics and competition are better reflected in the share price.”

Get The App

Join the millions of people who stay on top of global financial markets with Investing.com.

Download Now

Despite the possibility of a pause in the current upswing, Netflix is a stock to hold over the long-run, given the company’s expanding international reach, where any meaningful competition is still far behind. Netflix now has 182.9 million subscribers worldwide.

Its closest competitor, Disney (NYSE:DIS)—which launched its streaming service in November—is under financial distress after the pandemic forced the House of Mouse to close its theme parks, resorts, movie theaters and cruises around the world, damaging its ability to spend aggressively on its new venture.

Netflix's "stay-at-home" appeal made it both one of the best mega caps and tech stocks in which to take a position during this time of uncertainty. Today’s earnings report will show how sustainable these gains are and how the company is translating these gains into improving its financial health.

Growth in subscribers and the company’s forecast for this year will be the key factors in today’s report and should help explain whether the current rally in its stock is justified.