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Netflix Stock Could Move Big When It Reports Earnings

By Daniel Sparks – Jul 12, 2020 at 9:15AM

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Ahead of the streaming-TV giant's earnings report, here's what investors should know.

This week, Netflix (NFLX -2.24%) will help kick off earnings season. The streaming media company is slated to report its second-quarter results on Thursday, making it one of the first megacap stocks to report earnings for the second calendar quarter of 2020.

With shares of the media giant up 70% year to date and 50% in the past three months alone, expectations are high to say the least. Given a combination of strong price appreciation for the stock and uncertainty surrounding how lockdowns impacted Netflix during the quarter, the stock could move big in either direction following its upcoming Q2 report as investors digest new information from the company.

Here's a look at two key areas investors will want to check on when Netflix reports earnings.

A woman eating popcorn while watching Netflix

Image source: Netflix.

1. Subscriber growth

Driven by a spike in demand for streaming TV during the second half of March as consumers were sheltering at home, Netflix's first-quarter subscriber growth blew past expectations. The company added nearly 16 million new subscribers during the period. Analysts, on average, were expecting the company to add about 8 million subscribers. 

Investors will be looking for strong subscriber growth to continue in Q2. When the company reported first-quarter results on April 21, management guided for 7.5 million subscribers during Q2. But this may prove conservative as consumers have likely spent more time at home during Q2 than Netflix management anticipated.

"Given the uncertainty on home confinement timing, this is mostly guesswork," management explained in its first-quarter shareholder letter. "The actual Q2 numbers could end up well below or well above that, depending on many factors including when people can go back to their social lives in various countries and how much people take a break from television after the lockdown."

The uncertainty associated with Netflix's second-quarter subscriber growth is one reason why shares could easily make a big move up or down following the quarter, assuming the stock trades based on outperformance or underperformance of subscriber additions.

2. Margin expansion

Additionally, investors will want to pay attention to Netflix's reported operating margin.

The company has impressed on this front recently, with its operating margin rising from 10% in 2018 to 13% in 2019.

For the full year of 2020, management is targeting a 16% operating margin. Investors should look to see if the company is on track with this target.

Focus on the business, not the stock

Of course, it's impossible to know which way Netflix stock will trade following its earnings report. For that reason, investors should stay focused on Netflix's underlying business, looking to the update as a way to get better insight into how well the company is capitalizing on the opportunity of consumers' sheltering at home. Further, investors should look to any commentary from management on its expectations for the rest of the year.

Netflix will report its second-quarter results after market close on Thursday, July 16.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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