Netflix Inc. (NFLX) will report third quarter results on Tuesday, October 20, after the close of trading. Analysts are looking for the company to deliver substantial revenue growth and strong earnings. The significant growth is likely to be driven by a massive ramp-up in its total subscriber base in recent quarters due to the coronavirus pandemic. However, with much of that significant growth behind it, lower prices may lie ahead for the stock.
As a result of the immense subscriber growth, the stock has soared in 2020, rising by over 60%, easily outpacing the S&P 500's gain of about 7.8%; the big jump is a result of the stock's valuation going higher, as investors appear to be valuing the companies revenue more today than in the past.
Netflix vs. S&P 500
Massive Third Quarter Growth
For the third quarter, analysts estimate revenue to jump by around 21.7% to $6.383 billion, according to data from Refinitiv. Additionally, earnings are forecast to rise a stunning 45.8% to $2.14 per share. More importantly, analysts see the number of subscribers rising by around 3.4 million, which is down by nearly 50% from last year's net additions of 6.7 million.
One should not lose sight that Netflix has added a tremendous amount of users in 2020, with nearly 26 million net additions through the second quarter. That is roughly equal to the 27.8 million net additions they had in all of 2019. So despite the net additions falling in the third quarter, one must remember that the pandemic has resulted in a tremendous pull forward of subscriber growth.
Guidance from the company will be nearly as crucial, with analysts looking for revenue to rise by around 20.5% to roughly 6.5 billion, while earnings are for the fourth quarter expected to fall by 26.6% to $0.95. More crucial will be the all-important subscriber additions, which is estimated at 6.5 million.
Multiple Has Soared
The big push higher in subscriber additions in 2020 has undoubtedly helped to pull revenue and earnings growth forward. That has allowed the stock's price to sales multiple to expand to nearly the highest levels since 2018 at almost nine times one-year forward sales estimates. In that year, the company had total subscriber net additions of 30.8 million. Currently, the company appears to be on pace to break the 2018 total. It has helped to send the stocks one-year forward price to sales multiple to around 8, nearly equal to those 2018 levels.
Netflix Price-to-Sales Ratio
Trouble Ahead?
There is the potential that the high multiple is signaling trouble, especially if investors perceive that subscriber growth will begin to slow in 2021. After all, the sales multiple did decline in 2019, as subscriber growth slowed as noted above.
That weakness may also be reflected in the technical chart as the relative strength index shows a significant loss of momentum. The RSI has been trending lower since peaking around 78 on July 13. Additionally, the stock has tried to surpass the mid-July highs, but to this point have failed to do so.
Netflix Technical Chart
The stock also fell below a critical uptrend in August and has been unable to regain that trend line. The equity recently retested a break down in the uptrend by rising back to roughly $575. The stock failed at resistance on the uptrend. Confirming a bearish pattern is forming in the shares. A drop below $475 would create a double top pattern, which would result in a steeper decline for the stock.
While it seems possible that Netflix can surprise investors to the upside, it appears that all of the big growth for 2020 has already been captured. If that turns out to be the case, then the stock is likely to see multiple contraction, and lower prices in the future.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
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