Netflix Stock Heading Into Historically Bullish Quarter
The first quarter of 2020 is now behind us, and it was the worst first quarter ever for the stock market. The COVID-19 pandemic has wreaked havoc on economies worldwide and wiped out trillions in market value. With so many schools and businesses still closed to contain the outbreak, investors are wary.
In the coming weeks, all eyes will be on the quarterly reports of major corporations as management teams offer revised outlooks for the rest of 2020. Several technology companies like Apple and Microsoft have lowered their forecasts for the first quarter. However, as millions of people are stuck at home, entertainment companies like Netflix (NASDAQ:NFLX) have actually seen growing demand for their services.
While the Dow and S&P 500 fell 15% and 13%, respectively, in the first three months plus of the year, Netflix stock gained 16%. Already a star in this bear market, the streaming company is set to release its first-quarter results on April 21st, 2020. If Netflix can manage to beat consensus estimates for the period and provide better-than-expected guidance, the stock is likely to soar toward a new all-time high.
The chart of Netflix is just as appealing.
Netflix said last quarter, well before the coronavirus was a global pandemic, that it expected to add 7 million global paid users in the first quarter of 2020. This would mark a 17% expansion from the year-ago period and see NFLX end the period with 174.09 million global users.
Meanwhile, our current Zacks estimates call for Netflix’s adjusted Q1 earnings to skyrocket 113% from $0.76 per share in the prior-year quarter to $1.61 a share. The company’s first quarter revenue is expected to jump 26.1% to reach $5.70 billion. This would top Q1 FY19’s 22% sales growth
Last month, telecom giant AT&T said that Netflix's data traffic touched all-time highs on its network. The streaming giant also had to dial down its video quality in Europe and Canada to reduce bandwidth consumption in the face of rising demand as the pandemic keeps people at home. With limited entertainment options, Netflix is a pretty obvious choice for millions of people right now.
Google Trends does as well confirm that the company is gaining from COVID-19 stay-at-home orders. As you can see below, U.S. and global search volume for "Netflix" has recently reached an all-time high:
Looking closer, we can see that the spike initially began in mid-March at the onset of shutdown orders and has since declined a bit:
Indeed, it seems likely that those who did not yet have a Netflix subscription will now have one. This is not only because more are stuck at home, but also because sports on live television have been canceled.
Given the significant increase in Google Search volume, I would not be surprised the company beats on revenue. Of course, NFLX has surged nearly 45% over the past weeks, so maybe it is already priced into the stock.
Bottom Line
Whether Netflix will be able to beat or even meet first-quarter guidance is largely irrelevant for long-term investors. The streaming heavyweight ended 2019 with 167.1 million paid subscribers, an increase of 20% year over year. This number is estimated to reach 174.1 million in the first quarter, up from 148.9 million in the prior-year period.
The upcoming decade will see a huge shift in the consumption of streaming content, which has already resulted in a surge of new competition from entertainment giants such as Apple and Disney. Both companies launched their own streaming services in the last few months, and others -- including an offering from Comcast -- are on the way.
However, there is room for multiple winners in this industry -- U.S. families subscribe to 3.4 streaming services on average, according to a Forbes report.
So there's a good chance the company will be able to beat consensus estimates for the March quarter due to the near-term spike in demand for streaming services. This should drive the stock higher post-earnings, and even with new competition, Netflix is still attractive as the largest player in the streaming industry.
With an expanding content portfolio attracting more paid subscribers each quarter, Netflix is well-positioned to maintain its leadership position -- and its growth trajectory -- in the next decade.