NETFLIX Earnings Preview: Too Soon to Buy the Dip?

Netflix had a lot going for it through the pandemic but is facing some headwinds from a content backlog to a broader tech stock sell-off.

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The focus before Thursday's report
Investors are getting cautious about the company's outlook for the medium term amidst two significant issues that the company is facing:
delays in content production because of covid and
the impact of interest rate hikes on highly valued tech stocks

Very recently, Netflix took steps to address the content issue by raising prices. What investors are likely to be mainly focused on is whether that hike will simply be accretive to revenues per subscriber, or also slowdown subscriber growth.

Beyond headline earnings, the most critical element of the earnings release is likely to be subscriber numbers and operating margin forecasts. Additionally, any CEO comments on the content situation could be pivotal for the stock reaction. A lasting comment from last quarter was that earnings would "normalize" during the coming year.

Investors' concerned about backlog
Note that Netflix is seeing a significant backlog in their content, which has an accounting impact on their operating margin. So, this quarter's earnings are expected to have a thinner operating margin. But for next year, if the company projects an operating margin above 25%, that would be above expectations and could boost the stock.

Will forecasts line up with analyst expectations?
The main comparable to consider is the company's guidance on the top and bottom line for the rest of the year.

Earnings for Netflix are expected to grow by 23.64% in the coming year, from $10.70 to $13.23 per share. In Q4, Netflix is to report an EPS of $2.66.

Netflix reported $3.19 earnings per share (EPS) for the third quarter, topping consensus estimates of $2.56 by $0.63. Its quarterly revenue was up 16.3% compared to the same quarter last year.

Netflix dives into the Metaverse
During the quarter, Netflix was testing a gaming offering to improve its transition into the metaverse, putting it in direct competition with the likes of Steam. That could be a huge potential new line of business and source of revenue with high margins to boot. Any comments on how well the test went could also influence the stock.

NFLX has been smashed with all tech stocks
The streaming giant's shares have plunged nearly 30% since the all-time high of approx. $700 back in November, with half that printed in 2022 alone, as investors started bracing for interest rate hikes from the Fed this year.

On a relative basis, the S&P 500 has outpaced Netflix by nearly 20% year-to-date. Since the covid crash in March 2020, Netflix gained 58%, but the S&P 500 index outperformed the stock over this period too, with a gain of more than 100%.

Netflix share price outlook

Netflix shares are pulling back within a long-term uptrend (see weekly candlestick chart below). After a sharp decline at the start of the year, it is possible Netflix has already reached a YTD low and is set up for a fresh all-time high. But given the downward momentum, it would be no surprise if markets push shares down once more.

$580 is major resistance, while $470 is the next significant support – both formed from the sideways trading range last year.

Source: Spreadex Trading Platform

Takeaways
Investors will need to dissect Q4 earnings results first, focusing on subscriber growth and then assess the bigger picture around tech stocks.

Assuming the earnings results are good and the earnings report shows decent subscriber growth for Q1 and softening uncertainty around price hikes, then the stock could see a short-covering rally. On the other hand, if guidance indicates a slowdown in subscriber growth - enough to repel investors from the revenue boost of the price hike – then Netflix shares may succumb to further declines.