Earnings season is here. We've heard largely from financial services providers at this point, but a bellwether in consumer tech will step up with fresh financials this week. Netflix (NFLX -0.31%) will offer up its third-quarter results on Wednesday, shortly after the market close.
Like most stocks during earnings season, Netflix is likely to move noticeably higher or lower after its performance update. The stock plummeted 8% the day after announcing poorly received second-quarter numbers this summer. The shares are down 26% since the report. The premium streaming services pioneer will be on the move on Thursday. Yes, Netflix has a lot to prove this week.
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Netflix guidance back in July calls for revenue to rise 7.5% to $8.52 billion in the third quarter, which it will discuss this week. It may not seem like much, but it would be Netflix's largest year-over-year increase in more than a year. The earnings per share projection at the time was $3.52, an improvement of 13.5%. Again, this isn't the kind of heady growth that excites growth investors, but you have to go back two years to find a stronger percentage gain on the bottom line.
You can't call Netflix conservative in its guidance. It has emphasized in the past that it's putting out an honest internal assessment with its forecasts, and it's actually fallen short once or twice a year over the past few years. Analysts have diverged slightly from the streamer's own mid-July outlook. The consensus estimate is now $8.54 billion in revenue, an 8.9% increase that is better than the guidance that Netflix initiated. Wall Street's profit target has retreated to $3.49 a share, a 12.6% year-over-year advance.
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A lot has happened at Netflix this summer and early fall. Netflix began cracking down on password sharing in May, nudging users sharing their account access with family members and friends living outside of the primary household to create a secondary account at a reduced cost. The move started too late in the second quarter for us to get a fair read on the program's success, but there's no hiding now. The market will learn on Wednesday afternoon if the crackdown is spurring secondary premium account growth or if it's leading to an uptick in churn. With some of its smaller rivals also announcing plans to follow Netflix's lead here, it won't just be the company's own shareholders interested in hearing what it has to say.
Another thing to watch in this week's report is how Netflix is faring on cost controls in light of the resolution of one of the two strikes that had shut down most new content creation. It boosted its forecast for 2023 free cash flow from $3.5 billion to $5 billion in July, largely on the strike-related reduction in spending on new shows and movies. Has that guidance changed?
Finally, there's the possibility of service pricing moving the stock. Unconfirmed reports surfaced two weeks ago, detailing plans to increase subscription prices for its ad-free tier. Many of its peers have been jacking up their rates in an effort to trim their operating losses. Netflix is profitable. It doesn't have to pull that lever, but if it does, the stock could move higher in response.
Netflix stock has traded as high as $485 and as low as $234 over the past year. Despite the stock's historical volatility, wide trading range over the past year, and sharp drop since its last quarterly update, Netflix investors find themselves smack in the middle of where the stock has been over the past year. There's a good chance that the leader of streaming services stocks doesn't stay that way, with a bias to the upside if it can reverse the sentiment that has sent it lower in recent weeks. It has a lot to prove -- and move -- this week.
