Netflix Inc. (NFLX) will release its third quarter results on Tuesday, October 20 after close of trading. Analysts expect the company to see significant sales growth and strong earnings. The significant growth is likely to be due to a massive increase in the total subscriber base in recent quarters due to the coronavirus pandemic. However, given much of that significant growth, lower prices for the stock could be imminent.
As a result of the immense subscriber growth, the stock is up over 60% in 2020, well outperforming the S&P 500’s profit of around 7.8%. The big jump is the result of a higher valuation of the stock, as investors appear to value companies’ earnings more today than they have in the past.
Netflix vs. S&P 500
Massive growth in the third quarter
For the third quarter, analysts estimate that sales will increase by around 21.7% to USD 6.383 billion, according to Refinitiv. Additionally, earnings are forecast to grow an impressive 45.8% to $ 2.14 per share. More importantly, analysts are increasing the number of subscribers by around 3.4 million, a decrease of nearly 50% from last year’s net addition of 6.7 million.
It should not be overlooked that Netflix added a massive number of users in 2020, with nearly 26 million net additions in the second quarter. This roughly equates to the 27.8 million net additions for all of 2019. Despite the net additions declining in the third quarter, it is important to remember that the pandemic has resulted in a huge surge in subscriber growth.
The company’s forecast will be almost as important: analysts expect revenue to grow around 20.5% to around 6.5 billion, while fourth-quarter earnings are expected to drop 26.6% to $ 0.95 becomes. The important subscriber entries, which are estimated at 6.5 million, will be more decisive.
Multiple has risen
The sharp surge in subscriber numbers in 2020 has undoubtedly helped drive sales and earnings growth. This has resulted in the stock’s price-to-sales value rising nine-fold, to nearly its highest level since 2018, on nearly nine annual sales estimates. That year the company had a net increase of 30.8 million subscribers. Right now, the company appears to be well on its way to cracking the 2018 grand total. It helped the stocks sell a year-long forward price on sales of several to around 8, which is close to 2018 levels.
Netflix value for money
Refinitive data stream
There is potential for the high multiple to signal problems, especially if investors anticipate subscriber growth to slow in 2021. Eventually, the revenue multiplier declined in 2019 as subscriber growth slowed, as mentioned above.
This weakness can also be reflected in the technical chart as the relative strength index shows a significant loss of momentum. The RSI has been trending lower from its high of 78 on July 13th. In addition, the stock has attempted to beat mid-July highs, but has failed to do so as of now.
Netflix technical chart
The stock also fell below a critical uptrend in August and failed to regain that trendline. Equity recently retested a collapse in the uptrend by climbing back to around $ 575. The stock failed because of resistance in the uptrend. Confirmation of a bearish pattern is forming in stocks. A fall below $ 475 would create a double top pattern, which would result in a steeper decline in the stock.
While it seems possible that Netflix may surprise investors on the upside, it seems that all of the big growth for 2020 has already been captured. If this turns out to be the case, the stock is likely to contract multiple times and lower prices in the future.
Michael Kramer is a financial market strategist and portfolio manager of the Mott Capital Thematic Growth Portfolio.
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