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Should you Buy Netflix Stock Before it Releases Earnings Next Week?

Investor optimism over a potential economic recovery this year drove the Dow Jones Industrial Average (DJIA) gain last week. Netflix (NFLX) has been capitalizing on this market uptrend and enhancing its market reach through new media releases and strategic entry into emerging markets. With the COVID-19 inspired remote lifestyle of the last 10 months expected to continue in 2021, we think the stock should deliver significant returns on investment.

Investor optimism regarding the global economic recovery from the pandemic is being reflected in the stock markets, which closed at  record highs on the first trading day of 2021. The Dow Jones Industrial Average (DJIA) gained 1.5% last week. As the vaccination drive continues in most countries, industrial production and business activities have been surging.

The United States had vaccinated more than  540,000 people as of January 12 and is  implementing new strategies to pick up the pace. However, with  production capacity  limited, it is unlikely that most of the world’s population will be vaccinated this year.

Netflix, Inc. (NFLX), which has been one of the biggest beneficiaries of the pandemic, should climb further over the coming months as remote culture continues unabated.  The platform has a huge content pipeline for its  fiscal 2021, with more than  27 original shows  to be released in January alone.

The company reported record growth in subscribers during 2020, driving its stock to a 49.8% gain over the past year. This, coupled with several other factors, has helped NFLX earn a “Buy” rating in our proprietary rating system.

Here is how our proprietary POWR Ratings system evaluates NFLX:

Trade Grade: B

NFLX is currently trading above its 200-day moving average of $501.93, but below its 50-day moving average of $512, which does not  indicate a significant uptrend. The stock has gained slightly over the past month, reflecting modest bullishness. However, it has fallen  8.4% over the past three months.

NFLX’s revenue has increased 22.7% year-over-year to $6.44 billion in the third quarter ended September 30, 2020. The company’s operating income has risen 34.2% from the year-ago value to $1.32 billion, while its  net income has grown 18.8% from the same period last year to $790 million. Its EPS has increased 18.4% from the prior-year quarter to $1.74.

While net additions to its Board of Directors have slowed down over the last reported quarter, NFLX recently made some valuable  additions to BoD. The company appointed Strive Masiyiwa, founder and chairman of a telecommunications and technology group based in Europe and Africa, to its board on December 16. By leveraging Masiyiwa’s vast experience and market knowledge, NFLX should be able to enter the African markets with ease.

Buy & Hold Grade: B

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade considers,  NFLX is well-positioned. It is currently trading 11.7% below its 52-week high of $575.37, which it hit on July 13 last year.

NFLX has gained 129.5% over the past three years, which can be ascribed to its impressive earnings and revenue growth. NFLX’s revenue has increased at a CAGR of 29.8% over the past three years, while net income has risen at a CAGR of 85.4% over this period. Its EPS has risen at a CAGR of 83.6% over the same period.

As a pioneer media streaming company, NFLX has capitalized on the changing trend from cable subscriptions to OTT (over the top) platforms over the past couple of years. Through creative content additions and aggressive advertising, NFLX is the second largest media streaming company in the world after YouTube.

Peer Grade: C

NFLX is ranked #20 of 69 stocks in the Internet industry. Other popular stocks in this space are Alphabet, Inc. (GOOG), MercadoLibre, Inc. (MELI) and Booking Holdings Inc. (BKNG).

While MELI beat NFLX by gaining 160.2% over the past year, GOOG and BKNG returned 21.9% and 4.9%, respectively, over this period.

Industry Rank: B

The Internet industry is currently ranked #36 of 123 industries. As the name suggests, this group includes the tech savvy companies listed in on U.S. stock exchanges. As one of the most profitable sectors throughout the past year, the Internet industry  was the predominant driver of  the stock markets over the past year.

Given global vaccine deployment, many people believe the momentum of this industry will slow in in 2021 as lockdown measures are rescinded. However, an increasing reliance on technology for even basic requirements coupled with the remote working lifestyle should support this industry’s growth.

Overall POWR Rating: B (Buy)

NFLX is rated “Buy” due to its impressive financials, long-term bullishness, and underlying industry strength, as determined by the four components of our overall POWR Rating.

Bottom Line

While NFLX is currently facing severe competition with multiple emerging OTT platforms, the company’s substantial market reach, brand popularity, and unique content pipeline should drive its growth in tandem with the broader market.

NFLX is scheduled to release its quarterly earnings report on January 19.  It has an average broker rating of 1.64, indicating favorable analyst sentiment. Of 42 Wall Street Analysts that rated the stock, 11 rated it “Strong Buy.” The consensus EPS estimate of $2.08 for the fiscal first quarter ending March 2021 indicates a 32.5% rise year-over-year. Analysts expect NFLX’s revenues to increase 21.4% year-over-year to $7 billion in the current quarter.

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NFLX shares were trading at $500.86 per share on Thursday afternoon, down $6.93 (-1.36%). Year-to-date, NFLX has declined -7.37%, versus a 1.26% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.


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