Social Distancing and the Rise of the Streaming Industry. Eyeing Netflix's Earnings Report

Instead, investors are scrambling to find an industry branch that has its intrinsic value left intact by the onslaught of the rising market uncertainty. One such economic sector is the streaming industry in the US with one of its flagships being Netflix Inc. Unlike other firms in the Manufacturing and Services sectors, Netflix occupies a very particular branch of industry, which actually benefits from the national lockdowns in the US and elsewhere.

As we argued in our previous Netflix analysis, social distancing is going to affect Netflix's customers base positively as more and more people look for things to do while isolating themselves at home.

"As social distancing is becoming the norm in the US and elsewhere, the number of people spending most of their time at home can be anticipated to rise exponentially in the next couple of weeks. That is why streaming from home can be projected to undergo a marked rise within the next few weeks as well. […]"

The ongoing rally of Netflix's share price, which has risen by more than 20 per cent in the last several weeks, is thus supported by real expectations for improvement of the company's key metrics. In other words, the rally has intrinsic value because Netflix's business is not entirely dependent on government funding, but instead thrives on its own even at present.

Today the streaming giant is set to report quarterly earnings after the market close in the US, and investors would be watching closely on the reported number of new subscribers. If the earnings report's findings meet the initial expectations of investors, Netflix's share price is more than likely to continue rising into record territory. That is why today's analysis focuses on examining the pre-release outlook of the company's share price.

1. Long Term Outlook:

Since our previous analysis of Netflix's share price on the 17th of March, the stock's value has appreciated by almost 30 per cent. As can be seen on the weekly chart below, this rally is represented by the snap rebound of the price action from below the major support level at 315.00 to the current market price at 437.00.

The rally itself was prompted by the aforementioned investors' anticipations for increased paid subscriptions since the policies of social distancing were put in place in the US and elsewhere. When the quarterly earnings data is released later today, the share price is expected to continue rising on positive EPS data in addition to robust subscription numbers, but what is the current outlook of the bullish trend?

Last week, the price action broke out above the historical resistance level at 417.00, whose prominence was established when the level served as an upper boundary for the last Distribution range. Following on this significant achievement, the price action is now able to continue threading higher past the all-time high of 449.52 that was established last week.

Even if today's earnings report surpasses investors' initial expectations; however, the evolving bullish trend (most recent markup) could still form intermittent pullbacks. If the price action does indeed go on to create a minor bearish correction after the earnings data's release, Netflix's stock could fall to 417.00 before it finds the necessary support to continue trading higher. A breakdown to or below the major resistance (currently serving as support) level at 385.00 would mean the bullish trend is put under much strain, and it could have been exhausted.

2. Key Metrics in Today's Report to Watch for:

As we already stated in our 'Weekly Expectations' update from yesterday, Netflix is expected to report Earnings Per Share of $1.62, which is going to be the company's most robust quarterly performance on record, if realised. The company has an excellent past record of managing to deliver better-than-expected earnings reports, which supports the current optimistic investors' forecasts. Hence, for EPS equal to or exceeding $1.62, Netflix's share price is likely to jump. Anything below the mark could prompt the establishment of a minor bearish correction.

As regards the aforementioned metrics, two important indicators should be paid close attention to – paid memberships in the US and internationally. In Netflix's last earnings report from Q4 2019, it was observed that 423 thousand new paid memberships were added in the US in the three months leading to December 2019, and 8 333 million paid memberships were added internationally for the same period.

Naturally, beating these numbers locally and globally is going to boost Netflix's share price today; however, close attention should be paid to the US metrics in particular. That is so because paid membership costs more in the US than it does in other places. Hence, the company earns more revenue from a single US customer than it does from the average international customer. For comparison, the US revenue streams that Netflix recorded last quarter reached $2,457,663 vs $2,941,319 internationally.

Netflix's customer base in the US is arguably more concentrated compared to its international customers' base, but it yields much more revenue per added new customer. Hence, the 'paid net membership additions' indicator in the US is going to be the essential aspect of today's earnings report. A marked increase above 423 thousand is going to bolster the underlying share price. In contrast, a somewhat surprising depreciation below 423 thousand can likely be mitigated by an expected rise in international memberships. Overall, the outlook for Netflix is quite robust, and the market has every reason to expect a very solid earnings report later today.

3. Short Term Outlook:

The daily chart above confirms the previous assertions, expecting a major bullish trend to continue developing in the midterm. Using Elliott Wave Theory to categorise the different stages of the trend's development, it can be seen that around the time of the previous analysis' release, the price action had reached the dip of the broader 1-5 impulse wave pattern's first pullback (1-2). This happened below the major support level at 315.00, as the minor ABC correction (in orange) was terminated.

It follows that the currently evolving bullish trend is yet to complete its second impulse leg (2-3), one pullback (3-4), and a final impulse (4-5), provided that the recent all-time high at 449.52 does not mark the peak at 3. In other words, the currently evolving bullish trend still appears to be in the early stages of its development with much spare capacity for future growth remaining.

This theory is supported by the ADX, which is gearing up with much spare capacity for future growth. The index had only recently reached 24 points, which is below the 25-point mark indicating solid trending environment. Therefore, the nearly 30 per cent share price growth since Late-March appears to be only the early stage in the trend's development. This behaviour entails massive future gains.

As can be seen on the 4H chart below, the wide Bollinger Bands appear to be rising in unison with each other. This underpins the strength of the bullish commitment in the market.

Moreover, the MACD is also threading in positive territory, thereby highlighting the robust bullish momentum in the market. All of this favours the continuation of the current bullish trend's development.

4. Concluding Remarks:

The release of Netflix's earnings report later today is bound to cause heightened volatility in the few trading hours afterwards. However, the company's longer-term prospects anticipate the continuation of the bullish trend's development. These expectations are supported by the streaming service's intrinsic value, which, unlike so many other companies, is further bolstered during the lockdown. Measuring this intrinsic value can be done by observing the positive rate of change in Netflix's newly added paid memberships over the previous quarter.