Netflix's (NFLX 0.91%) shareholders have July 17 circled on their calendar. That's the day the company will report its financial results for the second quarter.
The streaming specialist has been on fire all year long. Its shares are up by 44% this year. However, much stronger-than-expected results could send the stock soaring even further -- and weaker-than-expected earnings could have the opposite effect.
Should investors purchase Netflix's shares before it releases its next quarterly update? Let's find out.
Image source: Getty Images.
Valuation could be an issue
Netflix has performed well this year because of its stellar financial results. The company's quarterly updates for the fourth quarter of 2024 and the first quarter of the current fiscal year were both excellent. According to Netflix's guidance, this trend is expected to continue in the second quarter. Netflix expects revenue of approximately $11.04 billion, representing a 15.4% increase from the second quarter of 2024.
The streaming specialist projected earnings per share (EPS) of $7.03, 44.1% higher than the comparable period of the previous fiscal year. The company's guidance also implies that its operating margin will jump significantly, going from 27.2% in Q2 2024 to 33.3%. Of note, Wall Street analysts have the same average revenue projection for the company for the second quarter, but they predict an average EPS of $7.06, according to Yahoo! Finance.
The direction in which a stock moves after its quarterly update partly depends on whether it can exceed its guidance (and Wall Street's) while giving investors an equally attractive projection for the third quarter. There is one major thing to consider in Netflix's case, though: valuation. Netflix is trading at 51 times forward earnings. That's pretty steep, especially considering the average for the communication services sector is 19.5.
That limits Netflix's post-earnings upside potential. The market is already expecting it to beat expectations. That's why it is commanding such a hefty premium.
Even if its results are on par with or slightly exceed its guidance, Wall Street might just shrug. However, if the company falls short of expectations, even slightly, or its third-quarter guidance doesn't meet The Street's standards, investors should expect a sell-off.
NASDAQ: NFLX
Key Data Points
It's best to focus on the long term
Investors considering buying Netflix's shares before July 17 should assess their goals and investment horizons. Those looking to make a quick buck on a potential post-earnings stock price jump would be taking a huge risk. It's next to impossible to predict how a company's shares will behave after a quarterly update. The market can sometimes be unpredictable in how it reacts.
However, investors hoping to hold onto the company's shares for five years or more should seriously consider initiating a position today, even with the stock's steep premium.
Netflix might dip after July 17 and give investors a more attractive entry point, but once again, it's impossible to predict. More importantly, the company's long-term prospects are excellent. That's another critical factor driving its performance in 2025.
Netflix has remained the leader in streaming despite the rise of numerous new platforms. The company has achieved this thanks to slight changes to its business, including the launch of a low-price, ad-supported tier. Management had long scoffed at that idea, but Netflix decided to adapt to the changing dynamics within the industry -- a decision that proved wise.
Despite these modifications to the company's business, Netflix's core strategy remains the same. It relies on producing or licensing top-notch content that attracts viewers, increases engagement, and enables the company to learn more about what its viewers want to watch, allowing it to produce or license more of the same.
This dynamic only improves as Netflix attracts more viewers, indicating a strong network effect. The company's brand name, which is synonymous with streaming, helps strengthen its moat.
Lastly, there is still massive whitespace in the streaming industry. Earlier this year, Netflix estimated a more than $650 billion revenue opportunity, which makes its trailing-12-month revenue of $40.2 billion look tiny in comparison. The stock should deliver strong returns regardless of what happens on July 17. That's why it's worth buying the company's shares today.
