Are Netflix Investors Banking Profits Before Earnings?

Netflix reached an all-time high before finishing last week with a sell-off. Are investors trying to bank profits in anticipation of tomorrow’s earnings report?

Buy the rumor, sell the news. 

People are streaming more than ever and Netflix (NASDAQ:NFLX) stock has reflected this. Up over 40% in a month, investors have been pouring into the streaming service recently as people are forced to remain at home, but a day in the red to close out last week begs the question: are these same investors choosing to take the money and run in anticipation of tomorrow’s earnings report?

In case you missed it:

Netflix Earnings

As is par for the course now with any growth stock, earnings reports have become a ruthless test of just how high investors’ expectations can reach. Recent temporary dips in stocks like Slack (NYSE:WORK) and Zoom (NASDAQ:ZM) after their respective earnings calls can be attributed to falling below this incredibly high bar. Both companies posted mouth-watering growth figures but the hype which had engulfed the stocks demanded unattainable results to match the surrounding enthusiasm. 

Investors have pumped Netflix stock to all-time highs in recent weeks on the rather safe assumption that the demand for the streaming service has shot up due to our current couch-bound conditions. While streaming figures have increased dramatically, the big question is whether this will be reflected in Netflix’s bottom line. In order to sate investors and maintain current levels, there is immense pressure on Reed Hastings & Co to post revenue and subscriber figures which are commensurate to the recent growth in stock price. Is this too big of an ask for the Blockbuster-killer? The market seemed to think so on Friday, with the stock falling almost 4%. 

Buy the rumor, sell the news. 

Netflix’s Valuation

Netflix’s valuation has come under scrutiny as its market cap briefly surpassed that of Disney’s (NYSE:DIS) last week. While the two may be battling for market share on the streaming front along with Apple (NASDAQ:AAPL) TV, Amazon (NASDAQ:AMZN) Prime, and Comcast’s (NASDAQ:CMCSA) soon-to-be-rolled-out Peacock service, in comparing the two businesses you may find some discrepancies with their respective valuations. Netflix revenue in 2019 was $20 billion; Disney’s was just shy of $70 billion. Now Disney is currently going through a rough patch, but to think it’s a smaller company than Netflix is ludicrous. The juxtaposition of the two is a great indication of what Wall Street values right now. Investors are seeking out high-growth tech stocks, with a monthly subscription service, high retention, and brand recognition, and are clearly more than willing to pay a significant premium for it. 

My colleague Jamie wrote a great piece last week comparing the two companies’ current predicament.  

What happens next for Netflix?

The volatility of Netflix right now means tomorrow’s earnings report will most likely lead to a big swing in stock price. If it goes up, it will be off the back of some big revenue numbers and an ambitious outlook in terms of future subscriber growth. It will take less for the stock to dip as expectations are turned up to 11.

Short term fluctuations aside, Netflix has come out and said “we don’t see any disruption in our output over the next few months”, ensuring the cornerstone of its business, its content, is somewhat safeguarded from forced closures of sets on all current productions. Whether the company is doing enough to ensure the long-term loyalty of its ever-increasing subscriber base is yet to be seen, as 2020 will see rival streaming services flood the market.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Disney, Apple, Amazon, and Netflix. Read our full disclosure policy here.