Why Netflix could abandon its conservative growth prospects on Thursday

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Investor enthusiasm could hardly be higher in the second quarter earnings report Netflix (NASDAQ: NFLX). CEO Reed Hastings and his team tried to moderate expectations after their eruption in the first quarter, but stocks climbed more than $ 500 in the weeks following their announcement in late April.

On Thursday afternoon, the streaming video giant will reveal subscriber trends for the months of April, May and June. And while there is an unusually high range of potential growth outcomes, most investors are preparing for yet another set of groundbreaking operational measures.

Let’s take a closer look.

Image source: Getty Images.

Still streaming

Investors didn’t have to squint to see the impact of the COVID-19 pandemic on Netflix’s last quarter results. Subscriber gains reached nearly $ 16 million in the first quarter, more than double the $ 7 million forecast by executives. This increase contributed to a 28% increase in revenues to $ 5.8 billion.

The second quarter will include much more of the COVID-19 social distancing period that kept people at home in the United States and Europe in the spring, so growth could be even stronger this week.

Hastings predicted a sharp slowdown in April, which predicted an acceleration in home containment trends, followed by a temporary abandonment of TV streaming media in the coming quarters. But leaders admitted that their advice for 7.5 million new members in Q2 was “mostly guesswork” given the uncertain trajectory of the new coronavirus. Thursday’s actual figure may be well ahead of this flexible target.

Content hiccups

With the limits of new content production efforts now spanning several months, investors are anxious to know if this restriction will hurt Netflix’s growth potential. There was no impact in the last quarter, as the streaming video giant had such a wide range of shows and movies that were already in the final post-production phase.

This could even help Netflix stand out from competitors like Disney (NYSE: DIS), who are building their modest content portfolios. On the other hand, the leader in streaming already has a wide selection of entertainment options and could more easily navigate through a period of supply challenges. In any case, the production hiatus improves Netflix’s short-term cash flow trends by postponing certain large expenses to 2021 and beyond.

Looking forward to

At the end of April, the main message to investors from Hastings was the caution that Netflix’s skyrocketing growth rate would inevitably slow in the following quarters. Part of this forecast was based on management’s estimate of consumer behavior. We’ve never been in a situation like this before, but it seemed reasonable to expect people to avoid indoor entertainment like streaming TV after an unusually long period of stay at home. Netflix also saw booming growth in the first quarter, as well as the lack of comparable comparable versions like Strange things and Money Heist, while the pressure on subscribers increases in the second half of 2020.

Much has changed since management made the forecast on April 21, and executives will also benefit from an additional three months of engagement data when they update expectations for the rest of the year.

Management will likely want to echo the cautious outlook it gave in the last quarter, particularly given the rally in stock prices in recent weeks. On the other hand, a second consecutive quarter of strong subscriber gains and improved cash flow trends could force Netflix to forecast exceptionally bright operating forecasts this week.



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