3 reasons Netflix will report blowout numbers

Momentum-driven stocks that are plagued by skepticism have a tendency to rise into a positive earnings report.

By TheStreet Staff Apr 20, 2011 10:44AM

By Ali Meshkati, TheStreet

 

A few months ago, I wrote an article that said Netflix (NFLX) would outperform Apple (AAPL) during any market correction. What I should have written, at that time, was that Netflix would outperform Apple, period.

 

The point of the article was missed by most. I take full responsibility as I probably mixed in too many distracting points and topics. It's not about an Apple vs. Netflix war of technology, executives or each company's place within this technology-driven world.

 

The point of the article was that market psychology drives stock price, irrespective of fundamentals. When a momentum-driven trend begins in a company that is under a tremendous amount of scrutiny and doubt, it creates a support dynamic for the stock. It allows the stock to continue to a share price and market cap that not even the founders of the company could have imagined would be possible.

 

Netflix is a prime example of this dynamic at work. I wrote about it in detail months ago. It's such a difficult concept for even seasoned investors to understand. It's a prime example of how the rational mind has no place in speculation. Apple is simply a popular stock that provides an excellent benchmark to illustrate the power of this dynamic.

The rational mind will be challenged once again when Netflix releases earnings on April 25. It will be a blowout number that sends the stock price to new highs and will only serve to draw more ire and criticism toward the stock, creating a further support dynamic that bearish investors will refuse to understand.

 

I base my guess of a blowout earnings number on the following:

 

1. Price action: Momentum-driven names that are plagued by skepticism have a tendency to rise into a positive earnings report. It is rare that they will reward a large group of bearish traders by closing near all-time highs and then plunging 20% or 30% on an earnings debacle. It happens, but the incidences are rare.

 

2. Company life-cycle: When we look back on Netflix ten years from now, whether the company is a leader in entertainment technology or a bankrupt penny stock, we will view this period of time as the point where Netflix took on big media/entertainment companies and won. Alternatively, it can also turn into the point where big media took a stand and turned the company into the next Blockbuster.

 

Netflix management is well aware of the importance of this point and time in the company's life cycle. A less than enthusiastic assessment of future earnings and the resulting plunge in the price of the stock would be the equivalent of attempting to take on a stampeding band of well-trained soldiers with a bb gun and a slingshot.

 

You can be sure that Netflix management will be as enthusiastic as possible about their future earnings estimates. Not to mention upcoming projects and advancements.

 

3. Seasonality: Q1 has historically been a strong quarter for Netflix. As every Blockbuster and Hollywood Video within driving distance closes, more individuals have no choice but to rely on movies by mail or direct streaming. The first few months of the year are the coldest, causing a spike in home entertainment activities. Netflix will be a direct beneficiary of both a lack of competition and increased demand in Q1.

Depending on what Netflix stock does this week, I will be putting on a trade to take advantage of what I see as a high percentage chance of pop in the stock price following earnings. A premature breakout to new highs or excessive weakness are two scenarios that will cause me to rethink taking the trade. I will post a "Trade Update" should a position be taken.

 

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