What to watch at Netflix's Earnings

I’ll break the analysis into a macro and micro (company specific) segment. On the macro side, Netflix is being supported by the large declines in the US 10-year yield given it’s high growth cash flows are being discounted at lower rates boosting its value. The other variable to factor in would be the dollar exchange rate given Netflix’s global business their offshore revenues would be hurt by a stronger greenback. Over Q2 the dollar weakened throughout April and May, but surged higher throughout June. The net effect is likely to be flat on overseas revenues.

Moving onto the company specific part of the analysis, the key piece of information out on Tuesday which traders should focus on is Netflix’s net paid additions to their subscriber base. We saw after 2021 Q1’s earnings release despite a beat on the top and bottom line, the big subscriber miss as well as shockingly lower guidance for Q2 net paid adds (well below consensus estimates) caused the stock to sell-off rapidly. This was likely to be the case as demand was pulled forward to 2020 given worldwide restrictions. The challenge for Netflix going forward is keeping its viewers engaged despite economies reopening and warmer weather, providing other activity options and most people likely to want to get out of the house as a result of cabin fever. I’m not expecting super strong net paid add numbers for Q2, however, the bar has been set pretty low with guidance for 1 mln new subscribers (that would be the lowest quarterly figure since 2016), so we could definitely see a surprise beat with a higher share price. Especially, if this is combined with solid guidance for Q3 which the market currently expects to be around 6 mln. The basis for this will be new seasons of popular shows such as Stranger Things, You and The Witcher etc as well as brand new content.

In terms of exciting new company news, it’s recently been reported that Netflix is planning a foray into video games within the next year. This is one of the many ways Netflix is trying to squeeze more growth from its more mature markets like the US. The strategy follows a two prong approach allowing Netflix to potentially acquire new customers as well as retain existing customers. This is also something none of its competitors are currently doing, helping to create a bit of a competitive moat. It may also give Netflix more pricing power in the future allowing them to expand their margins. Gaming makes logical sense given games such as Fortnite are lowering the amount of time Netflix’s customers’ spend on the platform.

Looking at the chart, Netflix has been in a range from July last year to present, bound between $477 support and $560 resistance. Price recently rallied back up to range resistance recently, but found selling pressure once again and backed off. The RSI also was in overbought territory, helping to bring confluence to selling pressure at resistance. Divergence was also present as price made higher highs and the RSI made lower highs, indicating buying momentum was fizzling out a bit. Currently the 21-day EMA is providing dynamic support to the pullback. There is also some mini support which has formed around the $525 level. The 50-day SMA remains below the 200-day SMA, but looks like it wants to cross above. Maybe a positive reaction to earnings will see this come to fruition. Downside targets would be the 200-day SMA just below $520 and the 50-day SMA just below $510, with more aggressive sell-offs eyeing the $477 range support. On the upside keep an eye on $540 and range resistance at $560.