Netflix share price: Q2 earnings preview

When are the Netflix results?

Netflix, the world's leading streaming entertainment service, with 183 million paid memberships in over 190 countries, is scheduled to report second-quarter (Q2) 2020 financial results on Thursday 16 July at 1pm (Pacific time).

What to expect from Netflix Q2 2020 results?

Netflix is fortunate in that the business is expected to run with minimal disruption over the short to medium term despite the current Covid-19 pandemic. The group has been able to continue with animation, voice-over and post-production projects, while on-set productions have been delayed.

In a note to investors released on the 21 April 2020, the group highlighted the fact that it was seeing a surge in viewership and increased membership growth, which would have been supported by a host of new quality content releases including the comedy series Space Force and the Michael Jordan documentary, The Last Dance.

The group, while continuing to grow its international footprint, should see a slight benefit from the more than 2% depreciation of the dollar over the quarter. The delay to on-set production initiatives will have freed up cash flow for the group for 2020.

While the current global environment uncertainty makes it much more difficult to forecast earnings for most businesses, that of Netflix is arguably (and subjectively) slightly less unclear.

The group has guided the following in terms of the upcoming results:

• Revenue growth year on year (YoY) - +22.8%
• Revenue - $6.048 billion
• Operating income - $1.08 billion (Q1 2020 $958 million)
• Operating margin - 17.9% (Q1 2020 16.6%)
• Global streaming paid memberships - 190.36 million
• Global streaming paid net additions - 7.50 million

How to trade Netflix’s results

Investors have historically been most concerned with the net additions figure released by the group. This quarter is expected to be no different. After an extremely strong Q1 for the year, where the net addition figure showed 15.77 million more paying subscribers, Q2 is expected to bring in a net figure of 7.5 million more paying subscribers.

The group’s massive subscriber growth with increased competition in Q2 has highlighted Netflix’s first move advantage, large global footprint and quality of content to aid customer acquisition and retention.

Should the global streaming net addition figure beat the 7.5 million expectation, it is likely that traders who are long will be rewarded for their positions in Netflix. Historically, when the subscriber numbers have fallen short of consensus estimates, it has caused short-term weakness in the share price which has rewarded those buying into that weakness as well.

Client sentiment

As of 13 July 2020, 77% of IG clients with open positions on Netflix expect the price to rise in the near term, while 23% of IG clients with open positions on Netflix expect the price to fall.

Broker ratings

As of 13 July 2020, a Thomson Reuters poll of 43 analysts have an average rating of ‘Buy’ for Netflix.

Netflix: technical view

The share price of Netflix has surged leading into its Q2 2020 results. The steepening red trend lines on our chart show how gains in the near term have been accelerating. The aggressive move higher has moved the company into overbought territory.

While the overbought signal is now a reason to trade short against the current uptrend firmly in place, it does provide the suggestion that perhaps a pullback or at least pause in the uptrend is possible. Traders respecting the uptrend might hope for a pullback towards trend line support to look for long entry. The nearest possible support level is considered at around 470 (at the trend line labelled 1).

Summary

• Netflix is expected to report strong results in Q2 2020
• Free cash flow could be positively influenced by delays in on-set productions
• The dollar weakness over the quarter should positively influence earnings
• Traders will look to a beat or miss relative to the subscriber numbers for short-term direction
• IG clients with open positions expect the price to rise
• The average (Thomson Reuters) broker rating for Netflix is ‘Buy’
• A chart suggests Netflix to be overbought in the near term, although the trend remains up
• Traders might hope to find long entry into a pullback should one occur