Netflix is missing out on the market's latest run. Josh Brown thinks that could change soon

Netflix (NFLX) is approaching a potential inflection point with its Q3 earnings report on October 21st, following a period of consolidation despite a 36% year-to-date gain. The company's outlook is bolstered by record-breaking content success, such as "KPop Demon Hunters," and the increasing profitability of its ad-supported tier, which is contributing to an anticipated 30% operating margin. Analysts project Q3 revenue growth of 15% and EPS growth of 24% year-over-year, with ad revenue expected to double, supporting its forward valuation and setting the stage for a strong Q4 content slate.

Analysis

Netflix (NFLX) is approaching a significant inflection point with its Q3 earnings report on October 21st, following a period of stock consolidation despite a 36% year-to-date gain. The company has recently underperformed its sector by 14% over the last three months, setting the stage for potential post-earnings volatility. Key drivers for the stock include subscriber growth, increased profitability from ad-supported tiers, and impactful content.

The company's content strategy demonstrates strong efficacy, highlighted by "KPop Demon Hunters" which achieved 325.1 million views, becoming Netflix's most-viewed title ever and expanding into music charts and theatrical release. This success underscores the platform's ability to generate cultural phenomena and drive engagement beyond traditional streaming metrics.

Financially, Q3 guidance projects EPS of $6.87, potentially exceeding the Bloomberg consensus of $6.70 on $11.3 billion revenue, implying 24% year-over-year profit growth and 15% top-line expansion. Operating margins are anticipated to rise to 30% from 29%, with ad revenue expected to double year-over-year, significantly contributing to overall profitability.

Despite a trailing P/E of 51x, the forward 37x P/E is considered justified by raised full-year guidance and the accretive ad business, alongside a robust Q4 content slate. The upcoming earnings report serves as a defined catalyst, though it also presents the risk of significant downside surprise, necessitating careful risk management.

Key Decisions for Investors

• Monitor Netflix's Q3 earnings report closely for subscriber growth, ad revenue performance, and operating margin expansion, as these are critical indicators for future valuation.
• Evaluate the risk-reward profile considering the defined earnings catalyst and the suggested $1,100 stop-loss level for managing potential downside volatility.
• Assess the impact of the strong Q4 content slate and continued ad-tier growth on Netflix's future guidance and sustained profitability.