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Buy Netflix (NFLX) Stock Down 20% Before Q4 Earning After Upgrades?

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Shares of Netflix (NFLX - Free Report) jumped nearly 5% through early afternoon trading Friday on the back of two analyst upgrades. The renewed positivity comes roughly a week before the beatdown streaming TV powerhouse is set to release its Q4 earnings results. Despite NFLX’s continued post-Christmas Eve climb, Netflix stock rests roughly 20% below its highs, which means now might be the time to buy NFLX on the dip before a possible 2019 comeback.

Upgrades

Raymond James analyst Justin Patterson upgraded Netflix stock from “outperform” to a “strong buy,” citing the company’s approaching profit inflection, strong content slate, and much more. Patterson also slapped a new $450 a share price tag on NFLX, which implies a 38% upside from its closing price of $324.66 per share Thursday.       

UBS also voiced positivity for NFLX stock Thursday, after analyst Eric Sheridan lifted his rating from “neutral” to “buy” and boosted his price target to $410 a share. “With content spend now at a scale of the major media companies and titles continuing to demonstrate outsized marketplace success, we see the moat around NFLX's global positioning widening and its long-term secular winner status remaining intact,” Sheridan wrote.

Investors should also note that Goldman Sachs (GS - Free Report) analyst Heath Terry reiterated his buy rating and $400 price target for Netflix stock last week. All of this analyst positivity has contributed to Netflix’s 45% surge since Christmas Eve.

In fact, NFLX has destroyed its fellow FAANG powers, Facebook (FB - Free Report) , Apple (AAPL - Free Report) , Amazon AZMN, and Google (GOOGL - Free Report) , to start 2019. Still, investors have a chance to scoop up NFLX stock on the dip since its stock hovered at around $340 a share through early afternoon trading Friday, which marked a roughly 20% downturn from its 52-week high of $423.21.

 

 

Netflix Overview

Netflix took home more Golden Globes last Sunday, five, than any another other network or streaming service. The firm also ended HBO’s17-year run on the top of the Emmy nomination last year. Both of these award show statistics are vital to Netflix’s long-term success because in the end, the only thing that will matter in an ever-more crowded streaming space is the company’s ability to roll out hit and critically acclaimed shows and movies.

Yet, many investors have grown nervous about Netflix’s original content spending, which is set to reach $13 billion in 2018. But CEO Reed Hastings knows that his company has to offer quality and quantity to stand out and attract customers over rival Amazon Prime and soon enough Disney (DIS - Free Report) , Apple, and AT&T (T - Free Report) . With that said, Netflix’s new CFO Spencer Neumann must try to strike a balance between spending and returning value to shareholders.

Netflix expects to produce a negative free cash flow of $3 billion in both 2018 and 2019. The company has also recently taken on more long-term debt. Yet the company clearly feels these are necessary moves to grow its subscriber base. “We recognize we are making huge cash investments in content, and we want to assure our investors that we have the same high confidence in the underlying economics as our cash investments in the past,” the firm wrote in its Q3 letter to shareholders.

Netflix is currently the largest streaming firm, boasting more users than Prime’s “more than 100 million” and Hulu’s roughly 25 million total subscribers, which soared 48% this year. Plus, the company expects to add 9.4 million subscribers in Q4 to help bring its worldwide total to 146.5 million—the firm added 8.3 million users in the year-ago period. And despite its growing revenues, subscriber growth might still be the metric Wall Street watches the most.

Q4 Outlook

Looking ahead, our current Zacks Consensus Estimate calls for Netflix’s Q4 revenues to jump 28% to reach $4.21 billion. For reference, NFLX’s revenues climbed 34% in the third quarter and 40% in both Q1 and Q2. Overall, NFLX’s full-year revenues are projected to climb 35% from $11.69 billion in 2017 to hit $15.81 billion in 2018.

Meanwhile, the firm’s adjusted Q4 earnings are projected to sink 39% from the year-ago period to hit $0.25 a share. Despite NFLX’s expected Q4 earnings decline, the company’s full-year 2018 earnings are expected to skyrocket 110.4% to reach $2.63 per share. Plus, peeking ahead to fiscal 2019, Netflix’s full-year earnings are projected to soar roughly 55% above our 2018 estimate.

Bottom Line

Netflix has gone on an incredible run over the last five years as it went from content aggregator to original TV and movie standout. Today, the company is a legitimate Hollywood studio that has attracted some of the biggest movie stars on the planet. Plus, the streaming TV market is only set to grow around the world as linear TV fades, just look at some of Roku’s (ROKU - Free Report) early Q4 results (also read: Buy Roku Stock on the Dip After Q4 Streaming Hours Soar?).

Lastly, investors should ask themselves if they imagine Netflix stock not at least returning to its 2018 high because it still has room to climb 20% before it hits that mark.

Netflix is currently scheduled to release its Q4 financial results on January 17.

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