Netflix Stock Has a Lot to Prove This Week

Investors are hoping to see history repeat with Netflix (NASDAQ: NFLX) this earnings season. Shares of the leading premium video service have nearly doubled over the past year, but it's up only 45% in 2024. The stock soared 35% in the final two-and-a-half months of last year, initially fueled by a blowout third-quarter report.

Netflix is always fashionably early to the earnings season red carpet. It will offer up this year's third-quarter financials after Thursday's market close. Will shareholders get another exciting rerun, or are expectations too high now? With Netflix stock hitting another all-time high on Friday, it will take a strong financial performance to keep the upticks coming.

Expectations are high

The guidance Netflix offered in mid-July was mixed. The streaming pioneer was expecting revenue to climb 14% to $9.7 billion for the three months ending in September, a sequential step down from the 17% year-over-year increase it delivered in the second quarter. The news gets better as we work our way down the income statement.

Netflix is targeting a sharp improvement in margins. Its forecast over the summer called for net income to soar 33% to $2.7 billion or $5.10 a share. Analysts have grown slightly more ambitious in the past three months. They are targeting a profit of $5.12 a share on nearly $9.8 billion in revenue.

The stock soaring 98% over the last 365 days does frame things in a different light. Netflix isn't exactly cheap at 37 times this year's earnings. However, investors are kicking themselves for not buying in a year ago at a forward earnings multiple that would've been in the high teens. If the bottom line keeps outpacing modest top-line skips, it doesn't mean the rally is over.

Image source: Getty Images.

Changing channels

Netflix isn't afraid to mix things up. Two years ago this month, it introduced a cheaper ad-supported plan. It started cracking down on password sharing last year. It also hasn't been afraid to follow the lead of linear television by spacing out new seasons of popular shows. If you woke up early on Wednesday to catch the latest two episodes of Love Is Blind, you know you will have to wait another week for the finale.

Next year, it will mix things up for investors. Netflix announced in April that it will stop reporting subscriber numbers in 2025. It wants investors to focus on revenue growth instead, especially as cheaper ad-supported plans start to bake ad revenue into the money it's making. Subscriber numbers will also start to get blurry as families start paying another $7.99 a month to add someone they used to share their account with but who lives somewhere else. The business model has changed, and so will the reporting of subscriber numbers, starting with the first quarter of next year.

The market is obviously fine rolling with the changes at the pioneer of streaming services stocks. Check the buoyant stock chart. Check the analyst activity. At least five analysts have boosted their price targets over the past week, getting in ahead of Thursday's financial update. These aren't small moves. The increases have ranged from $40 to as high as $100 more than their previous goals.

Expectations are high. Netflix will have to make sure that it goes higher.

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Rick Munarriz has positions in Netflix. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.