We're diving into earnings season, and Netflix (NFLX -0.62%) is one of the early arrivals with its third-quarter financial report on Tuesday afternoon. The leading premium video service is riding high. The shares enter the new trading week with a 64% year-to-date gain.
There have been moments of mortality on the way up. Netflix stock declined 6.5% the day after it posted results for its second quarter, so investors know that volatility is the norm during earnings season. Expectations are high leading into this week's report. Let's take a closer look at Netflix and what it will have to prove to Wall Street if it can keep the upticks coming.
Image source: Netflix.
Binge investing pays off
We know what Netflix was expecting to do in the third quarter. Three months ago it was targeting $6.327 billion in revenue for the quarter, 20.6% more than it delivered a year earlier. The bottom line is growing even faster, as the $2.07 a share profit that Netflix was modeling in mid-July is 42.2% ahead of where it landed in the third quarter of last year.
It's not a surprise to see Netflix booming. We're spending more time at home, and no one is spending as much as Netflix on content to keep its subscribers well-stocked with binge-worthy entertainment. Its summertime outlook calls for 195.45 million paying streaming members worldwide, a 23.4% increase over the past year.
Analysts aren't tethered to what Netflix saw in its crystal ball three months ago. The consensus Wall Street estimate calls for $2.13 a share in earnings on $6.38 billion in revenue. They clearly think that the fundamentals have inched higher in recent months, but Netflix historically putting out conservative guidance probably steers analysts to aim higher.
There are a few reasons to get excited with Netflix reporting shortly after Tuesday's market close. It has quietly ended the free trials it offers U.S. subscribers, something that it wasn't likely to do if it was struggling in attracting new members. It doesn't seem to be in a hurry to increase domestic prices -- especially after the hit it took on the subscriber front the last time it pushed out a hike -- but anything it can do to keep its subscriber base close and growing in these competitive times is a positive achievement.
Despite trouncing the market in 2020 the shares are actually marching in place in recent months. The stock is trading a mere 0.6% higher than it was the day it announced second-quarter results three months ago. A strong report -- especially after the market's uninspiring reaction last time out -- would result in a healthy bounce on Wednesday. We're not talking about a short squeeze, as short positions have actually been sliding steadily since peaking in December. However, another beat coupled with encouraging guidance to close out the final quarter of 2020 and the stock could be off to the races again.
Netflix would have to climb 22% in the remainder of this year to double in 2020, and that's certainly possible with a blowout performance this week. Netflix has been one of the market's hottest stocks over the past decade, but doubling in a single year is something that the shares haven't done since 2015. Netflix stock nearly quadrupled in 2013. The stage is set for Netflix to do something that it hasn't done in five years, but it's best chance to make it happen is now just a trading day away.
