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Netflix Stock Has a Lot to Prove This Week

By Rick Munarriz – Jul 13, 2020 at 10:00AM

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Netflix is a hot stock again, and it will need to pass its next quarterly test on Thursday afternoon to keep the good times coming.

The stakes are high for Netflix (NFLX -4.49%) this week. The undisputed champ of premium streaming video reports quarterly results shortly after Thursday's market close. With Netflix stock entering this week hitting another all-time high on Friday afternoon -- surging 26% since its last financial date -- there's a lot of air in the revolutionary service's shares. 

A lot can go wrong. A lot can also go right. Netflix has set the bar high heading into this week's second-quarter results, but things don't have to end badly for investors this week. The stock may be priced for perfection, but let's size up Netflix's own forecast and what it could deliver to see if it could exceed perfection. 

The cast of Spain's Elite in their prep school uniforms.

Image source: Netflix.

Streaming out loud 

There's been a sea change since Netflix issued its initial guidance in mid-April. The pandemic has only intensified. The competitive landscape has also intensified, but consumer appetite for streaming entertainment has only gotten more voracious. 

Netflix was expecting to have 190.36 million customers by the end of June. The 25.6% year-over-year increase would be the platform's biggest percentage increase since late 2018. This is always going to be an important measuring stick for Netflix, especially after the historically conservative guidance on that front fell short of reality in back-to-back quarters last year.

Netflix also expects to top $6 billion in quarterly revenue for the first time. Its target of $6.048 billion is 23% ahead of where it was a year earlier, and surprisingly it's the weakest top-line burst since the first quarter of last year. Netflix has played its pricing card close to its vest after a poorly received price increase early last year. Currency translations with the dollar appreciating over the past year will once again weigh on growth. Revenue gains are also being kept in check as growth shifts to international markets, where subscribers are paying less than in established territories. 

The news should be far better on the bottom line, as Netflix sees record operating profit and earnings. Netflix is looking at 53% year-over-year improvement with its $1.08 billion target for operating income. It sees net income more than tripling to $821 million, or $1.81 a share. 

Analysts see Netflix landing right on the $1.81-per-share profit it was modeling three months ago, but they're holding out for a little more on the top line with $6.08 billion in revenue. Despite the fertile soil for Netflix to grow its platform's engagement in the current environment, Wall Street isn't convinced that the disruptive media stock has another blowout to offer. Netflix will need a blowout performance to justify its recent all-time highs -- and build on them -- but it's hard to bet against it right now. 

Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.

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