Netflix (NASDAQ:NFLX) has little room to disappoint investors when it reports its latest earnings tomorrow. Its shares have gained more than 60% this year, becoming one of the best stay-at-home trades as people indulge in binge-watching on their streaming apps.
Though Netflix has successfully captured more viewers since March when COVID-19 spread globally, it’s unlikely that this explosive growth will continue forever. Netflix added 10.1 million paying customers worldwide during the second quarter that ended in June, more than the 8.3 million average analyst estimate.
But many of those new users are people who would have joined Netflix down the road if it weren’t for the virus, making the outlook for subsequent quarters less impressive. The company forecast just 2.5 million new subscribers for the third quarter, signaling that the pandemic-induced boom is perhaps over.
Despite management’s conservative guidance, investors have remained bullish about Netflix. What keeps them excited about this stock is the company’s scale and the weakening financial position of its new competitors after the pandemic-triggered recession.
Some analysts believe it will be hard to challenge Netflix’s first-mover advantage and its appeal in a market of mostly mediocre offerings. The company’s most feared competitors, such as Walt Disney Company (NYSE:DIS) and AT&T (NYSE:T) are struggling as their financial positions come under severe pressure due to the pandemic.
Goldman Sachs, while raising its 12-month price target to $670 from $600, said in a recent note that Netflix could produce a strong Q3 report tomorrow.
“We expect Netflix to report third-quarter results well above guidance and consensus expectations, with roughly 6 million net subscriber additions, driven by growth in content on the platform, a lack of competition for entertainment hours and spend, and more time being spent at home, potentially offset by churn levels modestly higher than we’ve seen in the past two quarters.”
For others, Netflix is a stock to hold over the long-run, given the company’s expanding international reach, where any meaningful competition is still far behind.
“Despite increasing competition, Netflix continues to capture a significant share of content consumption dollars. Additionally, with COVID-19 fears pushing consumers away from travel and out-of-home entertainment, we look for Netflix to continue as a beneficiary of this altered behavior,” Piper Sandler said in a note last week.
Netflix’s “stay-at-home” appeal made it both one of the best mega caps and tech stocks in which to take a position during this time of uncertainty. Tomorrow’s earnings report needs to show these gains are sustainable and the company is further fortifying its lead. That said, growth in subscribers and the company’s forecast for this year will be the key factors in that report and should help explain whether the current rally in its stock has more upside.