How To Play Netflix (NASDAQ: NFLX) Earnings

Within a couple of hours, investors will know just how well Netflix (NASDAQ: NFLX) is ticking over as the streaming giant is due to release its Q1 earnings after today’s session ends. With earnings season kicking off in earnest, they’re among the most eagerly awaited of the big tech names and are carrying some solid momentum with them into the release.

They’ve beaten revenue and earnings estimates in three of the past four reports, and have a high bar to jump this time too. Wall Street is looking for EPS of $2.98 and revenue of $7.13 billion, suggesting year-on-year growth of 89% and 24% respectively. 

Staying Bullish

In a note to clients last week, JPMorgan intimated that they think the market sentiment is underestimating what Netflix is capable of posting, and sees the numbers coming in ahead of management’s guidance. They highlighted the fact that third-party data has underestimated actual net adds in four out of the five past quarters and had no problem reiterating their Overweight rating and $685 price target. Even with the 10% pop seen in shares since the start of the month, that’s still suggesting an upside of more than 20%. 

It will be an interesting report as it’s the first that laps the COVID pandemic, which was in full steam this time last year, and the first that takes into account recent price increases. Morgan Stanley analyst Benjamin Swinburne spoke to these points recently while still coming out as bullish on the stock, saying “we continue to see Netflix as the global streaming leader, with a differentiated view of the potential earnings power of the business." 

While year-on-year comparisons will remain volatile for some time, Netflix has some attractive long-term margins and a solid free cash flow that should underpin a steady demand for shares. Like JPMorgan, Swinburne and his team reiterated their Overweight rating and their $700 price target on Netflix shares. Considering the all-time high from January topped out at just $591, the smart money is clearly expecting big things from the FAANG stalwart in coming months. 

The bears will point to an ever-increasing field competition for Netflix to compete against, one that now includes Disney (NYSE: DIS) and Amazon (NASDAQ: AMZN), but there’s something to be said for first-mover advantage, something which Netflix has in buckets. This month’s analytics report had Netflix leading the pack in total minutes viewed, a position they’re well used to holding. 

Indeed it could be said the pandemic was a blessing in disguise as a lack of social outlets meant more people were inclined to curl up on the sofa and stream movies. Recent churn figures suggest Netflix is holding onto these new subscribers too, and is expected to keep adding them in fresh numbers to the tune of 30 million per year for some time yet. 

Cowen recently went so far as to say the third wave of shutdowns could be considered a bullish catalyst as it would drive engagement. KeyBanc sees the ongoing vaccine rollout as a headwind but one that will affect all streaming services, but still likes Netflix for the long run with their stock buyback program a welcome counterweight acting as a tailwind. 

Getting Involved

From a technical point of view, shares have been setting higher lows which is always a solid signal that demand is increasing, as each dip is bought up more quickly than the last. Having consolidated much of last summer’s gains in the past six months, it looks like a fresh rally is ready to start anew, and some impressive prints this evening would go a long way to kicking that off. 

The stock’s RSI is at a comfortable 57 while the MACD is on the verge of a bullish crossover. If a bid is to be seen in the aftermath of tonight’s report, look for $570 to be taken out as an initial target. This is around where the bull’s momentum dried up in July, August, October, and January. The latter’s $593 all-time high print will be a key level to hit and if shares move confidently past there, there’s no reason they won’t keep moving into blue sky territory for some time yet.