Netflix (NASDAQ:NFLX) is set to report its first-quarter earnings results on Monday, and the drama has never been more intense. Since early March, Netflix shares have skidded about 30% on essentially no news. In other words, the momentum bubble that formed in the last year has popped. Still, Netflix shares are up about 100% in the last 12 months.

NFLX Chart

Netflix 1-year stock chart. Source: YCharts.

Given how quickly Netflix rose last year and how quickly it has fallen in the last month or so, investors should expect plenty of volatility after the Q1 earnings report and conference call. If Netflix reports another big earnings beat and strong Q2 guidance, Netflix shares could regain much of the ground they have lost. On the other hand, any stumble could push Netflix stock below $300.

A history of conservative guidance
Recently, Netflix has routinely crushed its earnings guidance. For Q1 2013, Netflix provided EPS guidance of $0.00-$0.23, but the company earned $0.31 per share excluding a one-time debt extinguishment loss. For the following quarter, Netflix projected EPS of $0.23-$0.48, and it ultimately delivered $0.49, again exceeding the top of the range.

For Q3 2013, Netflix projected EPS of $0.30-$0.56 and reported EPS of $0.52. However, the company accelerated some content expenses for accounting purposes in Q3 last year, which reduced pretax profit by $27 million. Without that expense, EPS would have reached roughly $0.80, way ahead of the guidance.

Last year, Netflix's earnings guidance was consistently conservative.

Finally for Q4, Netflix projected that EPS would reach $0.47-$0.73. The company handily beat the top of the estimate range with EPS of $0.78.

A new guidance policy
Based on Netflix's history of consistently beating its guidance in 2013, it is fair to guess that its guidance for the recently ended Q1 2014 was also conservative. However, Netflix just changed its policy around guidance last quarter. Previously, it had given estimate ranges for EPS and other key inputs -- now it is providing point estimates based on its internal forecasts.

In fact, Netflix claims that going forward, its guidance will not be conservative. In the Q4 shareholder letter, Netflix management stated, "This is our raw internal best-guess forecast, so we should land above it sometimes and below it sometimes."

Not surprisingly, Wall Street analysts aren't sure if they should believe this statement. The average analyst estimate of $0.83 is more than 5% ahead of Netflix's official Q1 EPS guidance of $0.78.

Netflix is modeling a slight sequential EPS decline for Q1, which is odd because the company is forecasting strong growth in domestic and international streaming subscribers. There are some potential offsets, though. CFO David Wells noted on the company's January earnings interview that DVD earnings will decline sequentially due to higher usage, while annual salary raises will increase costs.

Rising content costs could offset subscriber growth, reducing EPS growth.

Other factors that could hold back EPS include increased content spending, interest expense for debt issued this year, and the incremental cost of Netflix's paid peering arrangement with Comcast (NASDAQ: CMCSA).

Given that Q4 and Q1 are the strongest quarters for subscriber growth, it certainly seems like Netflix should be able to overcome these small earnings headwinds. A big earnings beat could put a lot of fears to bed. On the other hand, if Netflix's guidance proves to be accurate, it will be the first time in more than a year that Netflix misses the average analyst estimate. This would breed even more concern about Netflix's valuation.

Q2 guidance will be crucial
While Q1 is a seasonally strong period for Netflix, Q2 is the weakest part of the year, as good weather tends to draw people outside and away from their screens. A spring slowdown in subscriber growth is inevitable, but Netflix bulls may be underestimating just how much growth is likely to slow this quarter.

Netflix has previously told investors to expect that Q2 subscriber additions will decline each year (at least domestically). This didn't occur last year, perhaps due to the release of a new season of cult hit Arrested Development on Netflix. However, there is no equivalent growth driver this spring, so it wouldn't be surprising to see Netflix forecast very low subscriber growth.

Analysts are currently projecting that EPS will grow from $0.83 to $1.01 sequentially in Q2. That kind of strong sequential earnings growth seems hard to reconcile with the slow subscriber growth that is characteristic of Q2. (For reference, adjusted EPS did grow $0.18 sequentially from Q1 to Q2 last year, but that included the boost from Arrested Development.)

Pulling everything together
There are two main scenarios that seem most likely to play out when Netflix reports earnings. On one hand, it's possible that Netflix will beat its Q1 earnings guidance by a wide margin, earning EPS of perhaps $0.90. If that occurs, it won't matter if Netflix forecasts weak sequential growth for Q2 -- investors will chalk it up to more conservatism, and the stock could soar.

On the other hand, it's possible that Netflix will post earnings roughly in line with its guidance ($0.75-$0.85) and it will forecast modest sequential EPS growth. If Netflix's Q1 guidance turns out to be roughly accurate, investors won't be able to write off the company's Q2 guidance as conservative.

That could be a toxic mix for Netflix stock. The company will almost certainly post strong earnings growth in 2014 and 2015, but for richly valued stocks, the rate of earnings growth matters a lot. If Netflix's earnings growth appears to be slowing after its rapid expansion in 2013, Netflix stock could still have a long way to fall.