Netflix ahead of Q3 Earnings report

NETFLIX, H4 & Daily

Netflix’s third Quarter earnings for 2018 will be reported after the US Market close on October 16.  The consensus recommendation for the company is “strong buy”, corresponding to the majority of the consensus recommendation for the Online Services peer group , as 21 out of 32 Analyst Firms recommending “buy” or “Strong buy” and 9 suggest remaining on hold, while just 2 Analyst firms propose the “Sell” possibility.

According to Zacks Investment Research, the internet video service is expected to have $0.68 in earnings per share during the third Quarter of 2018, which represents an extraordinary yearly change of 235.35%, since the reported EPS for the fiscal Quarter ending September 2017 was $0.29. Focus should also turn on revenues number which is expected to be around $3.99 billion, from the $3.91 billion reported the previous quarter.

The consensus recommendation, similarly to economic data forecasts, has a significant effect on the near term stock price, as it represents a company’s wealth picture. Hence on every earning report, stock price is highly influenced by the comparison between the outcome and the expectations. The market tends to react positively if the outcome comes better or at least in line with forecast, while the price moves lower if the reported earnings miss expectations.

At this stage, we have to point out that since September 2017, the company’s earnings missed expectations only once and positively surprised twice, while they remained unchanged just once. Despite in line or missed earnings expectations, Netflix stock price was seen continuously increasing until it reached $423.00 high in June 2018. The constant incline was affected by the increase of revenue number, along with the sales estimates as well.

The fall since the earnings report release for the fiscal Quarter ending June 2018 was driven by the miss on sales and revenue valuations, despite the upbeat earnings. Therefore, stock market price could also be affected by subscriptions growth or revenue outcome as well.

More precisely, Netflix reported upbeat earnings per share up to $0.85 (vs $0.80)  for its second Quarter, while revenue came in less than expected at $3.91 billion (vs $3.94 anticipated based on Thomson Reuters estimates) and the company’s total subscribers growth domestically & internationally  also fell below projections for the first time in five Quarters. This caused the price to drop by nearly $113.00, to $310.00 level.

After the overall defeat in the second Quarter, the company’s management should have followed a more conservative method for third Quarter estimations regarding subscriber additions. If the company achieved accuracy with its forecast, then a positive earnings outcome without any negative surprises on revenue and subscriptions could attract many bulls back into the market.  After the sharp drop by 18.3% down, the past 2 weeks, a decisive turn above $351.30, could turn the attention to the $400.00 handle. The $351.30 reflects the confluence of 100-day EMA but importantly the 50% return of the losses seen in October which is a level of importance. Hence if price action manages to sustain a move above $351.00- $354.00 area (50-day SMA), is likely to turn to a bullish outlook again.

For now, the sell-off sentiment continues to push stock price lower, amid a combination of events such as the ongoing China-US trade friction, but mainly due to the worries over the uptrend in rates, something that is boosting the US treasury bond yields higher and gradually weakening the demand for equities. Hence the higher the yields the lower the stocks, especially “risky equities” such as tech stocks, i.e. Netflix as well. The investor’s earning season anticipation also undermines stock demand.

Contrarily, the extension lower for Netflix price, prior to the earnings announcement or even disappointing earnings outcome, could find immediate Support at the $308.00 – $310.00 area, which is the 5-month bottom and 50-week EMA. A break of this area however is crucial as it is a “free fall” from that level downwards. Support could possibly occur around April’s prices, at the $272.00 – $280.00 area, which coincides with the 150.0% and 161.8% Fibonacci extension of the decline from $386.46 peak. The 161.8% Fib. level coexists with the latest weekly low fractal.

Technically, the medium term outlook for the corporation’s shares remains bearish, with trading activity taking place below 50-100 and 200- day moving averages, while momentum indicators comply with this as well. RSI is at 31 and falling, suggesting that there is further space to the downside. MACD lines crossed below neutral zone and signal line, while they are increasing to the downside, suggesting the potential rise of negative momentum. However as long as the floor at $308.00 – $310.00 area holds, then the complete turn to a bearish outlook cannot be confirmed.