Netflix Q2 earnings: bracing for subscription slowdown but optimism to hold – Stock Market News



Netflix is due to release its Q2 earnings on Tuesday after the market close as its share price is ramping up on Wall Street for a second consecutive month. Analysts are forecasting another solid report, and although the explosive growth in 2020 may continue to dwindle, the broad outlook for the popular video streaming provider is expected to remain sunny. The consensus recommendation from Refinitiv analysts is buy.

Subscription growth may normalize

The company kicked the new year on the right foot, with revenues and earnings per share growing above expectations, by 24% and 138% respectively. While normally such an outcome would have seen the stock price gearing up, a miss in subscribers’ growth was enough to overshadow the rosy numbers and knock the stock down by almost 9.0%.

Since then, the stock has recovered a large share of the lost ground, but whether the rally can explode higher next week will likely depend on the new subscription numbers. With streaming platforms gaining immense popularity in 2020 because of the stay-at-home orders, Netflix membership skyrocketed by 36 million to 203.66 million in total. The gradual return to normalization, however, in 2021 reduced time for indoor activities, providing a smaller-than-expected audience of 3.98mln to Netflix in Q1. Management’s guidance for a softer addition of 1mln in Q2 was a bigger blow to traders sentiment back in April. Hence, how the Q3 subscription growth will develop and whether more declines will emerge will be a major question mark next week.

If the news disappoints investors, especially as forecasts from key financial institutions such as JPMorgan are set above company’s projections, the stock could dip to meet the 200-day simple moving average around $517. Otherwise, the price could head for the key $565.00 resistance territory.

Revenues to grow at a slower pace

As regards revenues, a slowdown is expected to emerge on an annual basis when compared to the impressive bounce in the previous quarter, though the number could still be satisfactory and higher than the one in Q1, growing by 19.12% to $7.32bln. In other data of interest, earnings per share (EPS) are forecast to ease to $3.16 from $3.75 but rise by 24.90% versus the same period last year.

Will Netflix stock rebound?

Perhaps some production delays may keep causing frustration to clients as long as Covid infections continue to circulate globally. Overall, though, given the removal of lockdown restrictions and the vaccination rollouts, the company will probably absorb a large part of the pandemic slack and ramp up content spending as promised in the Q1 press conference.

Of course, competition from big names such as Disney+, HBO, Apple TV and Amazon Prime, which are expanding furiously within the industry, may become more stressful in the years ahead. Still, Netflix, which is currently looking like a sleeping giant within the one-year-old sideways trading, could remain one of the buy-the-dip opportunities.

One of the main reasons is that first movers tend to keep the leading position. Moving from DVDs to streaming in 2007 when consumer demand for the product was practically nonexistent, the company managed to look a decade into the future, setting its roots dip in the ground and developing a cost and R&D model that may take years for newcomers to achieve.

Secondly, streaming services have the capacity for further evolution and Netflix has proved so far that it is capable to push beyond its limits and move closer to consumers’ preferences. On that front, incorporating the gaming world to its well-established platform seems to be its next target. The management has set a collaboration with former Facebook veterans and popular game executives to launch its gaming section as soon as next year.

Last but not least, although the moderate price increases in previous years dissatisfied consumers, investors could get more rewards from rising revenues as the company is counting on consistent pickups, especially if its recent efforts to combat password sharing results in more clients. Besides, with a P/E ratio of slightly above the average S&P 500 media and entertainment subgroup, Netflix’s stock could still be cheap to buy and a shine opportunity given the elevated ratings and target prices from several financial institutions.

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