Netflix (NFLX) Q2 Earnings: Stranger Things helps assuage customer decline, leads to EPS beat

• Netflix is scheduled to deliver earnings after the market closes on July 19.
• During the Q1 earnings call, NFLX guided for 2 million net customer losses in Q2.
• NFLX stock could break out on any gain in customers.

UPDATE: Netflix stock zoomed higher on its Q2 results late Tuesday. The streamer posted a loss of just under 1 million global subscribers, which was much better than management's own forecast for a loss of 2 million. Netflix posted GAAP earnings per share of $3.20, which bested consensus of $2.94 by a wide margin. The only sore spot was revenue, which came in at $7.97 billion, $60 million shy of the $8.03 billion forecast from Wall Street. Revenue, however, was hurt by a strong dollar, so the market did not react strongly to the miss. NFLX shares rose 7.6% to just under $217 afterhours and is up a similar amount in Wednesday's premarket session. This comes after it advanced 5.6% in Tuesday's regular session. "If there was a single thing [that helped us succeed], we might say Stranger Things," said CEO Reed Hastings in reference to the recent rollout of the fourth season of Netflix's biggest hit series. "We're executing really well on the content side."

Here goes the do-over. Last time around Netflix (NFLX) stock tanked as much as 40% in a single session after producing its first quarterly earnings featuring a loss of subscribers in a decade. That was Q1 earnings in late April. Much of the negativity around those Q1 results, however, had to do with Netflix guiding for a further loss of 2 million subscribers in Q2. After the market closes on July 19, the market will finally get to pull back the cover and see if things are really that dire for the leader in streaming. 

Also read: Amazon Stock Deep Dive: AMZN price target at $106 with near-term risks offset by long-term growth

Wall Street consensus has the streaming king pegged for $2.94 in GAAP earnings per share (EPS) on revenue of $8.03 billion. This compares to year ago figures of $2.97 on revenue of $7.34 billion.

Netflix earnings outlook: Strategy changes underway

Netflix lost 200,000 subscribers in Q1, and if its forecast from three months ago holds up, it stands to lose ten times that figure. The first quarter was hurt by cancellations due to Russia's war on Ukraine and related sanctions, but the current quarter will hinge on how much market share lower-priced competitors such as Disney+ have taken for themselves.

Nat Schindler, from Bank of America Securities, put out a note regarding a fall-off in mobile app downloads. Schindler's data says app downloads have dropped by about 12% compared with Q1, which may mean Netflix has been slow to acquire new customers. Still he said the Netflix bull case relies on the hit Stranger Things' Season 4 release keeping customers signed up. "If [the second quarter] goes well for Netflix attributable to Stranger Things, we worry it may be vastly more hit driven than prior years," Schindler said. "This may present a problem unless another original show captures its stature." Bank of America Securities holds a $196 price target on NFLX, just above the recent close at $190.92.

Netflix is a bit of a black box of late. While most stocks feature mostly upward or downward revisions to EPS, NFLX is fairly split for the current quarter. 10 analysts have provided upward revisions to Q2 EPS, while 16 have issued downward revisions. Morgan Stanley is much more upbeat on Netflix, saying that the streamer's entry into the $160 billion global video advertising market is key. Netflix announced last quarter that it is studying how to provide a cheaper, advertising-supported model. This should allow Netflix to be less reliant on high-priced subscriptions and make it more competitive with Disney+, according to Morgan Stanley.

Netflix will also probably provide color on its strategy of charging for sharing passwords. The initial testing phase for the new policy is underway in Argentina, the Dominican Republic, El Salvador, Guatemala and Honduras. Argentinians will be charged an additional $1.70 a month for using the "add a home" feature, while customers in the other countries will pay close to $3 to share their password with friends or family. Netflix said that basic plans can add one additional home to their package, while standard plan customers can share their password with two other homes, and premium users can share passwords with up to three other homes.

Netflix stock forecast: Room to target $205 resistance

Netflix stock has a couple of things going for it in the lead-up to the post-market Q2 release. First, it is cheap compared to it past valuations at earnings time. NFLX is trading for 17.7 times forward earnings, for 13.5 times forward EV/EVITDA, and 2.6 times forward sales. If subscriber numbers are better than expected, there is enough to spark an interest at those multiples.

Then there is the Accumulation/Distribution figure. It has been gaining since May and now sits near 1.6 billion. The support trend line that began in May is sloping upward with each successive higher low, and the Moving Average Convergence Divergence (MACD) indicator is also nearly the zero threshold. The 9-day moving average is also leading the 21-day average.

NFLX stock first resistance should come at $205, and $220 sits above if bulls get lucky. In case of a bad report, support at $172 should hold.

NFLX daily chart