Netflix Q4 Earnings Preview

Investors will be hoping to see Q4 results that echo Netflix’s strong Q3 earnings call. Find out what Wall Street expects, what technical analysis shows, and how you can trade the company's results.

When is Netflix’s earnings date?

Netflix., the Nasdaq-listed, world-leading, internet television network will report its fourth quarter earnings for 2018 on Thursday 17 January 2019.

Netflix Q4 earnings: What does Wall Street expect?

Investors will be hoping to see the fourth-quarter (Q4) results following on from the strong third quarter (Q3) which saw streaming revenue increasing 36% year on year and the group’s global paid membership moving past the 130m level.

In terms of the upcoming results, the group has given the following guidance as what we can expect for Q4:

  • Increase in paid net additions of 7.6m (+15% year on year)
  • Increase in total net additions of 9.4m (+13% year on year)
  • Q4 operating margin to be in a range of between 5% and 7.5% year on year
  • Full year operating margin to be between the 10% and 11% range in 2018

The Q4 - and second half (S2) - contraction in operating margin is said to be a result of a higher proportion of original films and content spend being realized over the period.

A Bloomberg consensus of analyst estimates arrive at a target of $4.206 billion in revenue for the quarter, with earnings per share - on an adjusted basis - expected to be realised at around 37c.

How to trade the Netflix results

Net subscriber addition figures have been of the most interest to investors and traders of Netflix. The company has seen its net addition of subscribers exceeding that of its estimates in 8 out of the last 11 financial quarters reported since early 2016.

Over this period, the share price has gained more than 250%. This has provided the opportunity for significant reward for all trades into results over this period, except for the last reported quarter in 2018 (Q3 2018). Trading the results in 2018 has, however, yielded less return with general tech sector apprehension weighing on the stock in sector sympathy.

All things being equal, buying Netflix into the company’s quarterly results since 2016, where the subscriber numbers have beat expectations, has produced favourable outcomes for traders 7 out of the last 8 opportunities. Buying into weakness when the subscriber numbers have missed expectations has also given the opportunity to yield a positive return with the share having recovered to renew gains over the next few days.

A Thompsons Reuters poll of 43 analysts maintain a long-term average rating of buy for Netflix (as of 14 January 2019), with 15 of these analysts recommending a strong buy, 14 recommending a buy, 11 hold, 1 sell and 2 with a strong sell recommendation on the stock.

Netflix earnings: technical analysis

A chart of Netflix shows the share price of the company to have rebounded roughly 40% since the lows realised on Christmas Eve in 2018. The rebound follows a resurgence in equity markets from last year’s lows, particularly within the technology sector space.

The move higher sees the share price now trading back above the 200-day simple moving average (SMA), often used as a long-term gauge of trend in technical analysis. It is often said that bulls live above the 200-day SMA and bears live below it, suggesting that a long bias in trades is favoured when the price is above this moving average, while a short bias to trades is favoured when the price is below this moving average. The share price trading above the 200-day SMA considers that the recent downtrend has been broken, and possibly reversed.

Contrary to the moving average trend indication, we see the Stochastic oscillator suggesting Netflix Inc. to be overbought at current levels. This is a suggestion that the short-term gains on the share may be overheated and that a pullback in the share price may be overdue.

While these technical indications do find a short-term contradiction, we place greater emphasis on the trend (downtrend being broken) than the momentum (overbought) signal. In turn a move higher, towards resistance at 384, is favoured (for now). In the event of a short-term pullback in the share price of Netflix, as suggested by the overbought signal, a long entry opportunity is also considered closer to the 290 level.

Only in the event of a significant price low being broken would we start to consider a downtrend and possibly a short bias to trades.

What to expect: Can Netflix buck tech’s downward trend?

Netflix Inc. remains the leading global internet television network with over 130 million subscribers in over 190 countries. Expenditure on content has been material and will negatively affect operating margins for the company in Q4 (and S2) of 2018. The investment in original content production is however necessary as it is expected to produce high returns and further shareholder value in the long run. Content looks to secure and maintain viewers within the company’s ecosystem.

The technology sector has been one under fire in 2018, as high valuations combined with macro uncertainties have weighed on investor sentiment. Throughout these headwinds Netflix has shown its resilience managing to produce a capital gain of 27% (from 29 December 2017 to 28 December 2018). Most surveyed analysts (as per Thompsons Reuters) maintain a long term bullish outlook for the company.

Traders trading into the company’s results every quarter since 2016 would have benefitted more from a long bias to trades rather than a short bias to trades, even in the event of the results falling short of consensus estimates. If the past has any bearing on the future, traders would favour maintaining a long bias on the stock into the Q4 results.

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