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Is Netflix’s stock poised to drop as Q3 earnings approach?


MongiIG

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While the stock has recovered from its lows for the year, the outlook is unlikely to have become much more positive for the streaming giant

bg_netflix_1380316.JPGSource: Bloomberg
 Chris Beauchamp | Chief Market Analyst, London | Publication date: Monday 10 October 2022 

When does Netflix report earnings?

Netflix is scheduled to report earnings for its fiscal third quarter on 18 October.

 

Netflix earnings – what to expect

Netflix is expected to report revenue of $7.8 billion, up 4.8% compared to a year ago. Meanwhile, earnings per share are forecast to be $2.14, down a third from the same period in 2021.

 

It has been a miserable year for Netflix. It lost 1.2 million subscribers in the first six months of 2022, and the stock price suffered accordingly. Q2 sales were up 8.6% in Q2, but this was the slowest pace in almost a decade. As the above forecasts show, the picture is not expected to improve. Indeed, Netflix may provide a foreshadowing for the entire US earnings season, i.e. a theme of ‘things are bad, and are unlikely to get better soon’.

 

Netflix has seen its subscriber base eroded thanks to several growing problems. Firstly, the streaming space is becoming more competitive. For years the company was unchallenged, but Apple, Amazon, CBS, Paramount and others have all launched pay-to-view services, requiring Netflix to spend more on big-name content to attract customers.

 

But even this may not be enough in an era of high inflation and rising interest rates. This two challenges combine to squeeze consumer budgets and reduce the amount available to spend on streaming services. In the pre-pandemic years, when prices were relatively stable, it might have been feasible for people to maintain subscriptions to a number of streaming services. Now, with households facing squeezed budgets, they must be more picky.

 

Thus while Netflix may put a brave face on Q3 numbers, and subscriber levels may actually recover a touch, it will find it difficult to approach Q4’s earnings with much optimism.

 

Netflix stock price – broker ratings and target price

Of the 43 brokers covering Netflix, by far the largest number, 24, currently have a ‘hold’ rating on the shares. This is down from a high of 32 in May, but it is a far cry from the heady days of summer 2021, when only single digit numbers advocated a ‘hold’ stance.

 

Meanwhile, the number of ‘buy’ recommendations has risen to 13, from a low of 9 in September, but this compares with 35 ‘buys’ back in 2021! Six brokers have a ‘sell’ recommendation, a level unchanged in recent months.

 

At present, the current median target price is $244.84, representing upside of 8.9% from the current price.

 

Netflix stock price – technical analysis

Netflix touched a five-year low over the summer, nearing $160 a share for the first time since 2017.

 

Interestingly, while the broader market rebounded over the summer but then fell back, Netflix has been able to hold on to most of its gains since the May low. But upside progress has been held back below $250, preventing a longer-term bounce. Bargain-hunters will have been relieved to see the price hold above $215, creating a short-term trading range.

 

Much is riding on the upcoming earnings and the outlook for the rest of the year. A poor set of numbers and a gloomy outlook could see the price drop back below $215, and then this would open the way to a move back to the 2022 lows.

 

Conversely, the stock needs a positive report to attempt another move above $250 that might lead to a bigger bounce towards the 200-day SMA (currently $293). However, the broader downtrend is still firmly intact, even with some more upside to claw back some of the huge drop of April 2022.

NFLX_101022.pngSource: ProRealTime

Calm before the storm for Netflix

The overall macro outlook still suggests caution is warranted on Netflix. After its consolidation of the last three months a fresh drop could well develop in the wake of earnings, with little to suggest that the longer-term outlook has turned more positive.

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