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Late next week, Netflix (NFLX 0.88%) will help kick off earnings season. As one of the first Wall Street darlings to report on the fourth quarter, the streaming-TV giant’s results will be closely watched.
With shares of Netflix gaining some momentum recently after plummeting in the first half of 2022, some investors might be hoping for a further bump in the stock price when the company reports earnings next Thursday. If revenue, profits, and subscriber growth come in better than expected, the stock could jump.
So, is Netflix a buy before its earnings report? Or should investors wait so they can have more information?
Addressing the main premise of this article, it’s simply impossible to know whether a stock will go up or down after an upcoming earnings report. Guessing the stock’s move correctly would likely require anticipating both the key metrics included in the quarterly update and the market’s reaction to it. This is, obviously, an impossible task.
So deciding whether or not the stock is a buy before an earnings report isn’t about trying to get the perfect entry point to make a quick buck. Instead, investors should simply consider whether or not they believe the stock is a good long-term bet based on all of the available information.
So let’s dig into two important topics that help investors get a better idea of whether or not Netflix stock is attractive today.
While there are many unknowns going into Netflix’s earnings report next week, one thing is nearly certain: The reported subscriber growth for the fourth quarter and the guidance for first-quarter subscriber growth will be key figures to watch.
Following a period of extremely robust growth in subscribers in 2020, when many people were staying at home to help slow the spread of COVID-19, the increases slowed in 2021, and then slowed even more during the first nine months of 2022. Specifically, total subscribers rose about 22% year over year in 2020, 9% in 2021, and about 4% for the trailing-12-month period ended Sept. 30. Going into Netflix’s fourth-quarter report, investors are likely wondering if subscriber trends deteriorated further during the period.
Based on management’s fourth-quarter guidance for paid subscriber additions, growth is expected to slow when measured on a year-over-year basis. Management guided for subscribers to increase 2.6% year over year to nearly 228 million.
The silver lining, however, is that the guidance implies stronger sequential growth in the fourth quarter than in the third quarter. Overall, the outlook suggests that the worst could be behind Netflix as it relates to the pull-forward in demand that the pandemic created in 2020 and 2021.
While it’s always possible that this silver lining didn’t materialize and sequential growth actually slowed during the fourth quarter, it’s good to know that management expected otherwise at the time of Netflix’s third-quarter update.
Perhaps an even better reason to like Netflix stock today is the rollout of digital ads on its platform. The company has been working hard on building an advertising business in order to launch an ad-supported subscription option.
This ad-supported tier started rolling out in some of the company’s major markets in November. By the company’s first quarter, this ad-supported tier could start contributing meaningfully to Netflix’s growth.
With management guiding for strong sequential growth in subscribers in the fourth quarter, and with the ad-supported tier ramping up, the stock’s valuation looks quite attractive today. Sure, a price-to-earnings ratio of 28 isn’t necessarily cheap. But it’s not a bad price to pay for a market leader with a major new catalyst for its top line on the horizon.
Overall, the stock looks like a good buy headed into the earnings report. But for those investors who are bullish on the company but are cautious about the numbers that could be reported in the fourth-quarter update, it might make sense to wait until the earnings report is out before they buy any shares. The other benefit of waiting, of course, is that investors who buy the stock will have more information about Netflix to make their decision.
Editor’s note: This article has been corrected. Total subscribers rose about 22% year over year in 2020.
Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
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