Q4 US earnings preview: Netflix and its great expectations

Having traded in a high-to-low range of over 45 per cent in the last six months, Netflix’s share price has proven prone to extreme upward and downward swings, caused by a host of macro and micro drivers.

Of course, because of its status as one of Wall Street’s most popular tech-sector growth stocks, one factor impacting the Netflix share price has been developments in the broad information technology sector.

It must be stated, that given its subscriber-based, streamed-content driven product offering, Netflix shares have been shielded from most fears regarding the US-China trade war that has affected the likes of Apple and myriads of US chipmakers.

But due to the perception held by some that Netflix is little more than another “tech-unicorn”, the company’s share price has at stages suffered from souring sentiment towards US tech-stocks, along with US equities more generally.

During December’s market-rout, Netflix shares fell over 19 per cent, and during October’s major sell-off, they fell by almost 22 per cent.

True to form, though, the price did bounce back on both occasions, and as of the beginning of reporting season, is trading 30 per cent above its yearly lows.

Looking at Netflix’s fundamentals, according to Bloomberg data, equity analysts are expecting EPS to have fallen to $0.24 in Q4, down from $0.89 in Q3.

The contraction in EPS is down to transitory factors related to higher content costs, with the company’s top line expected to have grown by 28 per cent for the quarter.

Promisingly for the bulls, analysts are forecasting a solid result for the key subscriber net adds metric: an increase of 9.25m users, up from a gain of 6.81 in the previous quarter.

Ultimately, according to the gamut of broker analysts, the consensus price target for Netflix shares is $381, with 29 analysts of the surveyed 43 giving a “buy recommendation”.

Considering the pre-reporting season consensus forecast from sell-side analysts, the technical set-up for Netflix becomes interesting.

The velocity of the recovery in Netflix’s share-price makes the company look slightly overbought in the short-term. Under normal trading conditions, a temporary pull back to a support level at $US311, which incidentally coincides with a convergence of the prices 100-day and 200-day EMA, might be expected.

However, Netflix’s looming earnings report superordinates the technical dynamics. An earning’s surprise could shift market technicals enough to inspire a considerable move in either direction.

If the company’s earnings managed to beat estimates, impetus conceivably exists in the short-to-medium term for a rally in its share price to analyst’s consensus price target at $US381 – a price that incidentally sits just below a technical level of resistance at $US386.

Whatever the outcomes of this quarter’s earnings, the numerous factors at play influencing Netflix’s share price have the company positioned for another potentially volatile quarter, offering traders with risk tolerance an opportunity to trade its possible swings.