Should You Buy, Hold, or Sell Netflix Stock Ahead of Q2 Earnings?

Netflix, Inc. NFLX is set to report second-quarter earnings on Thursday, after market close. Will the results boost the stock price, and is it a good time to buy?  Let’s dive in.   

What Will Happen to Netflix Shares After Q2 Earnings? 

Netflix’s $10.5 billion revenues in the first quarter marked a 13% increase from the same period last year. Its earnings per share (EPS) reached $6.61, a 25% rise year over year. These results followed the company’s strong revenue and EPS growth in the fourth quarter, which exceeded investor expectations. 

Netflix anticipates that this positive trend will continue into the second quarter. The streaming giant predicts revenues of $11.04 billion, a 15.4% increase from the previous year. Its projected EPS is $7.03, up 44.1% from last year. Additionally, the company projects operating margins to rise from 27.2% in the second quarter of 2024 to 33.3%. 

Furthermore, Netflix’s trailing four-quarter earnings surprise averages a positive 6.9%, suggesting the company could deliver second-quarter growth that might boost its stock price. (Find the latest EPS estimates and surprises on Zacks Earnings Calendar.)

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However, based on the price-to-earnings (P/E) ratio, Netflix trades at 49.62 times forward earnings compared to the Broadcast Radio and Television industry’s forward earnings multiple of 35.79. This high valuation suggests Netflix’s potential for post-earnings growth is limited, as Wall Street already expects the company to beat second-quarter estimates. If the company fails to meet or exceed projections, investors should prepare for a potential sell-off.   

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How to Trade Netflix Stock Now? 

Investors looking for quick profits following the surge in Netflix’s stock price after its earnings report are facing significant risks. Predicting share price fluctuations after earnings releases is challenging, but the long-term outlook for Netflix appears positive. 

Due to shifts in business dynamics and intense competition, Netflix launched a low-cost, ad-supported tier. The move turned out to be successful since this tier now makes up nearly half of Netflix’s signups and has enabled the company to sell ad slots to advertisers. Netflix’s ad revenues rose last year and are expected to double by 2025. 

Netflix believes that there is a $650 billion revenue growth opportunity in the streaming industry. Being a leader in the streaming industry, Netflix is well-positioned to capitalize on this growth with its top-notch content. Last December, Netflix's NFL Christmas Day games attracted many viewers. This year, NFL games will again be streamed and are expected to attract a large audience. Additional events like SummerSlam, WrestleMania and boxing matches featuring Canelo Alvarez versus Terence Crawford will also draw viewers, enhancing the company’s revenue. 

Netflix’s management is feeling positive about the company’s potential for growth. Many believe that the streaming giant will reach a valuation of $1 trillion by 2030, as reported by The Wall Street Journal. Some of the notable names in that club are NVIDIA Corporation NVDA, Microsoft Corporation MSFT, Apple Inc. AAPL, and Alphabet Inc. GOOGL.  

Additionally, Netflix has been more successful in generating profits compared to the industry as a whole, boasting a net profit margin of 23.1%, in contrast to the industry’s negative 15.9%. This suggests that there is room for further growth. 

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Therefore, investors should ignore short-term price fluctuations after the second-quarter earnings release. Instead, they should capitalize on Netflix’s long-term growth trend and buy the company’s stock now. Netflix has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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