It's that time of the year. Companies are gearing up to report their financial results for the important holiday quarter. As always, one of the first companies to kick off earnings season is Netflix (NFLX 1.71%). The streaming-TV giant is scheduled to report its fourth-quarter results on Jan. 19.
Ahead of the update, here's a quick earnings preview and a look at whether shares are a buy, sell, or hold today.
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Subscriber growth is key
For Netflix's fourth quarter, analysts are expecting revenue to grow about 21% year over year to $6.6 billion. Earnings per share is forecast to rise from $1.30 in the year-ago period to $1.38.
The metric investors will be most focused on, however, is likely Netflix's subscriber growth. Subscribers are the lifeblood of the subscription-based streaming service.
Management guided for 6 million new subscribers in 2020 -- a figure that is much higher than the 2.2 million new subscribers Netflix added in Q3. But the subscriber additions would still be far below the 15.8 million and 10.1 million subscribers it added in the first and second quarter of 2020, respectively, when consumers were sheltering at home and spending more time in front of their TVs.
If Netflix can achieve its guidance, it would highlight a huge year for the company, putting total subscribers at more than 200 million for the first time.
Is Netflix stock worth 80 times earnings?
While it's impossible to know whether Netflix stock will move up or down when the company reports earnings later this month, it doesn't hurt to take a look at the stock now to see whether it's attractive based on the information we have today -- particularly since shares have slid 7% this year, potentially creating a buying opportunity.
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Netflix's pricey-looking price-to-earnings ratio of about 80 today may scare some investors away. But a better understanding of the company's growth potential shows that shares deserve to trade at a significant premium like this. Not only is Netflix's revenue growing rapidly but its operating margin (operating profit as a percentage of revenue) is widening at a rate of about 300 basis points annually -- a trend management expects to persist in the coming years.
Rapid top-line growth and an expanding operating margin could lead to enormous earnings-per-share growth in the coming years. Indeed, analysts are expecting earnings per share to grow at an average rate of about 40% annually over the next five years.
Given the company's strong momentum, it may make sense for shareholders to get in on this growth stock today as long as they plan to hold for the long haul. There will undoubtedly be ups and downs but the company's business momentum and earnings-per-share growth potential suggest there's a good chance that shares will appreciate nicely over the long haul.
Netflix will report its fourth-quarter results after market close on Tuesday, Jan. 19.
