Is Netflix stock a buy ahead of January earnings?

Key Points

• Netflix shares continue to rally and undo 2022's sell-off.
• Heading into a new year, competition remains robust, but the key trends are strong. 
• It's looking more and more like the smart money is buying in ahead of earnings on January 23rd.

Even though a 75% drop through 2022 may have disqualified Netflix Inc NASDAQ: NFLX from the previously untouchable FAANG group of tech stocks, the current rally of nearly 200% has certainly put it back in investors' good books. It's been a long road of recovery for a stock that couldn't do anything wrong for a long time, as the streaming giant has had to adjust to a changing reality of viewing habits and emerging competition.  

But for all that, Netflix's revenues are at all-time highs, and its shares are having their best run since 2017. With earnings due out towards the end of the month, it's a good time to weigh up the opportunity on hand. Buying into a stock ahead of a fresh earnings report can be risky, as results tend to be binary; they're either good or bad. But when you have the stomach for taking on that kind of risk, the results can be outsized, especially when you can make an informed decision beforehand. 

Bullish trends

Take, for example, the recent report from Wedbush, who, late last month, ran a survey that pointed to strong subscriber growth and average revenue per user (ARPU) expansion. Beyond those ad-hoc insights into key headline numbers, almost across the board Netflix's metrics shone. New and returning subscribers were more likely to opt for the ad-supported tier, while former account-sharers continued to opt for new accounts following last year's crackdown.

The Wedbush team had no problem reiterating their Outperform rating on Netflix shares and even went so far as to add the stock to its Best Ideas List for 2024. Looking ahead to January's earnings, they expect the company's free cash flow, in particular, to come in well above guidance. Their price target of $525 points to further upside of at least 10% from where shares closed on Wednesday and would extend the existing rally to fresh highs. 

There seems to be a growing consensus that Netflix has once again found its feet and is back in action with a winning formula when it comes to global content creation. Management has also shown they can effectively balance costs while driving profitability, and investors have made it clear they're confident this trend will continue. 

Despite growing competition, Netflix remains well-positioned in the streaming landscape, while some of its peers have struggled to establish a coherent strategy that's set up for long-term success. In addition, the company's crackdown on password sharing is having a better-than-expected effect when it comes to boosting both subscriber numbers and ARPU. 

Furthermore, Netflix's advertising business is set to become a revenue contributor in 2024, reducing churn and attracting new subscribers. With these kinds of tailwinds in place, it's hard not to see Netflix shares continuing to gather momentum and for the earnings report due on January 23rd to beat existing expectations. 

Getting involved

There was a slight check in that momentum this week, with shares falling nearly 5% on Tuesday. However, they were being snapped back up in yesterday's session and were up again in Thursday's pre-market trading. A little bit of consolidation here would be no bad thing, as last quarter's rally was so strong it pushed the stock's relative strength index (RSI) up into overbought territory. While not exactly bearish, a red-hot RSI reading that's above 70 can make it tough for further gains to materialize without some unwanted volatility, so some profit-taking and sideways action actually help in the long run. 

Look for shares to stay above $460 going into the weekend and for the upward trend to emerge again next week. That would confirm the momentum is still with the bulls and would suggest the smart money is positioning itself on the long side ahead of earnings in two weeks' time.